Bloomberg Businessweek-Europe Edition May-16 May-22-2016
Bloomberg Businessweek-Europe Edition May-16 May-22-2016
Bloomberg Businessweek-Europe Edition May-16 May-22-2016
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hen you think of sectors that deploy to harness augmented reality (AR) via papers subtitle, The Link Between Com-
new technology as fast as research smart glasses. Its goal, according to Markus petitive Advantage and Corporate Social
can generate it, aerospace, elec- Kueckelhaus, DHLs Vice President of Responsibility, its easy to see why a global
tronics and healthcare often leap to mind. Innovation and Trend Research, is to organization like DHLactive in over 220
Freight shipping and logistics? Not so much. enable intelligent hands-free operations. countries and territories worldwideis
But thats rapidly changing. Today, the indus- In this vision picking scenario, smart guided by such a lofty vision.
try attracts both tech startups hoping to apply glasses worn by workers scan barcodes Seven years ago in its corporate strategy,
QHZ FRQFHSWV DQG YHQWXUH FDSLWDO UPV WKDW during the gathering of products from DHL announced the goal of becoming the
VSHFLDOL]H LQ KLJKWHFK QDQFH 7KH PDMRU inventory, and early results have yielded Logistics Company for the World. Around
logistics players are also recognizing the need D SHUFHQW LQFUHDVH LQ HIFLHQF\ the same time, it launched an enterprise-
to get in on the act, either through strategic Behind all of this is a desire to drive wide GoGreen initiative, which, as
partnerships with these newcomers or their IXUWKHU HIFLHQF\ LQ WKH VXSSO\ FKDLQ Kueckelhaus notes, became operationally
own in-house innovations. and achieve a strategic advantage in integrated into everything we do. So while
So when you hear about workers wear- the marketplace. But the company also it sees itself as a vital force in international
ing augmented reality glasses moving boxes sees innovation as an important tool in trade, the companys aim is also to be
around a DHL warehouse, it shouldnt come addressing societys increasing demands a benchmark for responsible business,
as a surprise. In partnership with electron- for sustainable business practices. We setting and adhering to a strict code of
ics company Ricoh, the logistics giant is recognize the rise of this new imperative fair-and-responsible business.
running a pilot program in the Netherlands within our markets, Kueckelhaus explains. On a day-to-day basis, the average
person experiences a company like DHL
in a brief, here-and-gone fashion. But
At a Ricoh the gathering of is already a stra- through constant innovation and reinven-
warehouse in the products from tegic advantage
tion, which are a prerequisite for long-term
Netherlands, work- inventory. One of that is impacting
ers use augmented many new innova- the supply chain,
success in todays highly competitive
reality smart tions piloted by yielding a 25 logistics marketplace, the company is
glasses to scan DHL, this intelligent, percent increase making a clear declaration that it is very
barcodes during hands-free process in efficiency. much here to stay. David Gould
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PHOTOGRAPH BY MICHELE SIBILONI FOR BLOOMBERG BUSINESSWEEK
Domestic Cover
Opening Remarks Why Larry Summers is taking on the Fed 12
Cover is on our current economic
Bloomberg View Venezuelas meddling military Time for e-cigarette ads to butt out 16 state. Janet Yellen is quietly
optimistic that were bouncing back.
Global Economics Larry Summers thinks were
on a path to catastrophe.
Banks are blocking war-zone charities 18
Whos right?
Saudi Arabias new energy minister plans to keep the oil owing 20
Beijing confronts a looming debt disaster 20 Theres no way to predict the future,
but the story points to some
Panama hates the Panama Papers, but it still has a bit of a thing for the shell company business 22
concrete examples that back
Larrys point of view.
Companies/Industries
The Takata recall just doubled in size. Getting your replacement air bag may take years 27 Has he made an efort to warn us?
Brazilian businesses crave resolution on the ouster of Dilma Roussef 28 Hes a vocal critic. And hes
Germany develops a case of Tesla-phobia 29 constantly making his argument on
social media and at conferences
Charges of intellectual-property theft blossomin the ower biz 30 around the world.
Briefs: Amazon takes aim at YouTube; Staples backs away from its $6.3 billion bid for Oice Depot 32
And he also got passed up
Politics/Policy for her job, right?
If international trade caused your layof and youre lucky, theres help 35 Yes.
Will Silicon Valley heavyweights line up behind Hillary? 36
I see whats happening here.
The UAW is determined to get into an Ivy League school 37
Revenge of the panhandlers 38
Technology
8 Apple prepares for a second stab at streaming music 41
It looks like the decade-long smartphone party is over 42
Phones that unlock with a ngerprint let cops do an end run around encryption 43
Accountants at Facebook and Amazon factor in all those employee stock grants 44
Innovation: Inatable expansion modules for the International Space Station 45
Markets/Personal Finance
Bond yields are low, stock valuations are high, and nest eggs arent going to go as far 47
Assisted living in Manhattan, for those who can swing $20,000 a month 48 International Cover
DOMESTIC COVER AND COVER TRAIL: SUMMERS: ANDREW HARRER/BLOOMBERG; YELLEN: COURTESY FEDERAL RESERVE
The right to sue your bank may soon be restored 49 I think a photo of the U.S. Federal
When couples divorce, they can split the house, but what about the labradoodle? 50 Reserve chair and the man who
almost got her job might not be a big
Charlie Rose talks to ne art auctioneer Simon de Pury 54
draw for people outside the U.S.
Focus On/Mid-Market Strongly disagree.
Whats light, crunchy, and saw its sales quadruple in the last two years? SkinnyPop 57
How many foreign central bankers
Business Talent Group brings consultant fees down to size 58 can you identify?
Vroom refurbishes and guarantees the cars for sale on its site 59
I feel like you asked me that
Features expecting that I wouldnt know any,
and rather than play your sick game,
Hawaiian Punch-Up Millionaires are suing billionaires over beach chairs on the Big Island 62 Im going to retain my dignity by
silently walking away
Theres an Oil Bust? Pioneer is doggedly drilling new wells in West Texas 68 and designing another cover.
Guns for Hire How Uganda became the world leader in mercenaries 72
Etc.
Are cognitive enhancers the new breakfast of champions? 79
Design: Seventies-inspired oice furniture is very of-the-moment 82
Technology: One reporter, one week of living by Googles auto e-mail generator 83
Beauty: The best products for your face this summer 84
The Critic: Money Monster picks up where The Wolf of Wall Street and The Big Short left of 86
What I Wear to Work: Sandra Reshef pared down to 125 pairs of shoes, but shes still the Queen of Clearance 87
How Did I Get Here? Restaurateur and head Top Chef judge Tom Colicchio didnt last long as an ice cream scooper 88
Index
People/Companies
B Sandberg, Sheryl
Sanders, Bernie
36
35, 36
Ball Horticultural 30 Sanford C. Bernstein (AB) 44
Bank of China
Bankhaus Metzler
20
29
Concho Resources (CXO)
Cond Nast Entertainment
70
32
G Log Commercial
Properties (MRVE3:BZ) 28
Saudi Aramco
Saul, John
20
64
Barbosa, Nelson 28 ConocoPhillips (COP) 32 Gap (GPS) 32 LVMH (MC:FP) 41 Schultz, Howard 64
Becker, Craig 37 Cook, Tim 41 Gavekal Dragonomics 20 Schwab, Charles 64
Beepi
Berg, Pierre
59
54
Cooper, Matthew
Cordray, Richard
50
49
General Mills (GIS)
General Motors (GM)
57
27, 29 M Sheield, Bryan
Sheield, Scott
70
70 22
Juan Carlos
Bernanke, Ben 12 Crafted Hospitality 88 GoDaddy (GDDY) 64 Maduro, Nicols 16 Shift Technologies 59
Varela
Beyonc 41 Cramer, Jim 86 Gokey, Tim 58 Marks, Howard 64 Simmons, Gail 88
BGC Partners (BGCP) 41 Crowdpac 36 Google (GOOG) 32, 80, 83 Martinelli, Ricardo 22 Simes, Fernando 28
Bigelow Aerospace 45 CrownQuest Operating 70 Gore, Al 36 Matzner, Eric 80 Sothebys (BID) 54 Vroom 59
Bigelow, Robert 45 Cue, Eddy 41 Greenlight Capital 70 Mayer, Marissa 80 SpaceX 45 Walmart Stores (WMT) 64
Bilyk, Paulo 28 Griin, Ken 64 Mazda (7261:JP) 27 Spalding, Tom 70 Walt Disney (DIS) 32, 64
BlackBerry (BBRY)
Bloch, Allon
42
59 D Groupon (GRPN)
Gunn, Anna
80
86
McKinsey
Meheula, William
48, 58
64
Spotify
Standard Chartered (STAN:LN)
41 Walton, Rob
Welltower (HCN)
64
48
10 BMO Capital Markets 48 Daicel (4202:JP) 27 Mercedes-Benz (DAI:GR) 29 18 West, Dominic 86
PHOTOGRAPH BY BEN SKLAR FOR BLOOMBERG BUSINESSWEEK: CLINTON: MELINA MARA/THE WASHINGTON POST/GETTY IMAGES; VARELA: KIYOSHI OTA/BLOOMBERG
BMW (BMW)
BNP Paribas (BNP:FP)
27, 29
18
Davis, Joslin
Dell, Michael
50
64 H Meyer, Danny 88
Miller, Jody Greenstone 58
Staples (SPLS)
Starbucks (SBUX)
32
64
West, Kanye 41
Westhof Vertriebsgesellschaft
Boston Consulting Group 58 De Pury, Simon 54 Heartland Dental 58 Mitsubishi (7261:JP) 27 Sterling-Rice Group 57 30
Boundless Nutrition 57 DeRosa, Thomas 48 Hines 48 Morgan & Morgan 22 Stiglitz, Joseph 22 WeWork 80
Boyle, Tim 64 Diamond Foods 57 Hofman, Jefrey 45 Morningstar (MORN) 48 Strategy Analytics 42 Woo, Geofrey 80
Brandt, Michael 80 Diamondback Energy (FANG) Home Depot (HD) 30 Mossack Fonseca 22 Subaru (7270:JP) 27 Wrigley, Julie Ann 64
Broadridge Financial 70 Honda (HMC) 27 Motorola (0992) 42 Summers, Lawrence 12, 48
Solutions (BR)
Brown, Sherrod
58
35
Diatec
Dorsey & Whitney
35
18
HowStufWorks
HP (HPQ)
32
36
MSD Capital
Musk, Elon
64
29, 36
Swift, Taylor 41
XYZ
Broxon, Mark
Budweiser (BUD)
30
38
Draghi, Mario
Drake
12
41
HSBC Holdings (HSBC)
Hualalai Resorts
18
64 T Xi Jinping
Yahoo! (YHOO)
20
80
Bufett Ellliott, Bertie 64 Drillinginfo 70 N TA Associates 57 Yellen, Janet 12
Bufett, Warren
Bush, George W.
44
35, 37
Durbin, Dick 12
I Nasser, Amin
NatWest (RBS)
20
18
Takada, Shigehisa 27 Zynga(ZNGA) 80
Bush, Jeb
Business Talent Group
36
58
E IBK Securities
IBM (IBM)
42
58
Netix (NFLX)
Nike (NKE)
44
42
Easterbrook, Frank 38 IDC 43
Nissan (7201:JP) 27
C EBay (EBAY) 32 Iger, Robert 32
Nootrobox 80 How to Contact
Edmunds.com 29 Industrial and Commercial
CarMax (KMX) 59 Einhorn, David 70 Bank of China 20
Nootroo 80 Bloomberg Businessweek
Carney, Mark 18 Emirates NBD (EMIRATES:UH) Insight Investment 48
Carvana 59
Ennis, Tom
20
57
Intel (INTC)
Inventure Foods
36, 44
57
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Subscriptions 800 635-1200
Oaktree Capital Management
Euromonitor International 57 Iovine, Jimmy 41 Address 731 Lexington Ave., New York, NY 10022
35
Hillary
Evensky & Katz/Foldes
Financial 48
IRI
Ive, Jony
57
41
Obama, Barack 12, 35, 36
64
E-mail bwreader@bloomberg.net
Clinton Exane BNP Paribas 29
Oberto Brands 57 Fax 212 617-9065 Subscription Service
Oice Depot (ODP) 32 PO Box 37528, Boone, IA 50037-0528
ExxonMobil (XOM)
Eztec Empreendimentos e
70
J Oi (OIBR) 28 E-mail bwkcustserv@cdsfulllment.com
Participaes (ETC3:BZ) 28 Oracle (ORCL) 36
JAB Holdings 32
OConnell, Jack 86
Reprints/Permissions 800 290-5460 x100 or
Janus Capital Group 44
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F Jawbone
JPMorgan Chase (JPM)
80
12 P Letters to the Editor can be sent by e-mail, fax,
Facebook (FB) 36, 43, 44 JSL (JSLG3:BZ) 28
Favreau, Jon 88 Paes, Eduardo 22 or regular mail. They should include address,
Pandora (P) 41 phone number(s), and e-mail address if available.
FedEx (FDX)
Fiat Chrysler
32
K Parsley Energy (PE) 70 Connections with the subject of the letter should
Chevron (CVX) 70 Automobiles (FCAU) 27 Kajima Corp. (1812:JP) 64 Parsons, Bob 64
be disclosed, and we reserve the right to edit for
China Minsheng Fiorina, Carly 36 KKR (KKR) 64 Paul, Rand 36
PayPal (PYPL) 36
sense, style, and space.
Banking (1988:HK) 20 Firestein, Les 64 Krispy Kreme
Cisco Systems (CSCO) 36 Fischer, Stanley 12 Doughnuts (KKD) 32 PepsiCo (PEP) 57
Petrobras 28
Corrections & Clarications
Citadel 64 Fitch Ratings 20
Hedge Fund Managers Lose Their Swagger
Citigroup (C)
Clinton, Bill
20
12, 35, 37
Fitzgerald, Patrick
Flex
64
42
L Pickens, T. Boone
Pincus, Mark
70
80 (Markets/Finance, May 9-May 15, 2016) said that a
Clinton, Hillary 35, 36 Ford (F) 27 Lagasse, Emeril 88 Pioneer Natural $100,000 investment in the Standard & Poors
Clooney, George 86 Foster, Jodie 86 Lakshmi, Padma 88 Resources (PXD) 70 500-stock index in February 1997 would be worth
CLSA (600030:CH) 20 Fox (FOXA) 37 Laplanche, Renaud 32 Plant21 30
$6 million today, and an investment with Elliott
Colicchio, Tom 88 Frampton, Susan 64 LendingClub (LC) 32 Popcorn Indiana 57
Columbia Sportswear (COLM) Frank, Barney 35 LG (066570:KS) 43 Porsche (VOW:GR) 29 Management would be worth $14 million. The two
64 Frankel, Bethenny 57 LinkedIn (LNKD) 44 Proven Winners 30 investments would be worth approximately that if
Conagra Foods(CAG) 57 Fugazza, Antnio Emlio 28 Loeb & Loeb 87 Prudential Financial(PRU) 48 the start date were February 1977.
POWER TO CHANGE
YOUR WORLD
13 JUNE - 1 JULY 2016 EXHIBITION CENTRE LIVERPOOL, UK
Inspirational, disruptive and prophetic, the Blue Skies day programme introduces you to
some of the worlds leading figures, including FW De Klerk, Former President of South Africa
who ended Apartheid.
Along with 14 other inspirational personalities, Mr De Klerk will share his story, his motivations
and his thoughts on how we can all challenge convention and achieve something truly special.
To attend a Blue Skies event for free, join the International Festival for Business Club:
www.ifb2016.com/ifb-business-club
Opening Crazy things are happening in the world
economy. In Europe and Japan, interest
rates have turned negative, something
shape than central bankers understand.
Focusing on monetary policy alone, he
says, theyre doomed to fall short of reviv-
Bad Rut
By Peter Coy
economist who almost got Yellens job,
has no patience for such patience. Since
losing out to Yellen in 2013, hes been
jetting around the worldfrom Santiago
is true, its a total game changer. It will
afect how we think about macroeconomic
policy for the next several decades, says
Gauti Eggertsson, an Iceland native who
to St. Louis to Florence, worked in the Federal Reserve System
Italyto argue that the world for eight years and is now a macro-
economy is in much worse economic theorist at Brown University.
In November, after Summers presented
his ideas at the Peterson Institute for
International Economics, its president,
Adam Posen, himself a former policy-
maker at the Bank of England, blogged
that all of us in the profession have a lot
12 of work to do to respond to the disturb-
ing questions Summers raised.
For economic policymakers, the most
disturbing question is why global growth
remains paltry and uneven. The annual
growth rate of gross domestic product
in the U.S. in the January-March quarter
was just 0.5 percent. The euro zone was
stronger than the U.S., at 2.2 percent;
Japan, which has been lipping in and
out of recessions for a quarter century,
shrank 1.1 percent. Delation once seemed
to be a strictly Japanese problemnow
its a worldwide threat. Pessimism about
growth prospects is relected in low fore-
casts for long-term interest rates. The
annual yield on German 10-year notes is
only 0.13 percent.
It wasnt obvious in the summer of
2013, when President Obama was choos-
ing between Yellen and Summers, that
Summers would turn out to have such
out-of-the-box ideas. Obama said that
when it comes down to their basic phi-
losophy on the future of the Fed, the dif-
ferences between the candidates were
so small you couldnt slide a paper
between them, according to Democratic
These are weird times. Senator Dick Durbin of Illinois, who
attended a meeting with the president.
Growth is weak. Interest Both were highly credentialedshe as
rates are negative. a longtime Fed oicial who was a labor
Is there a way out? economist at the University of California
at Berkeleys Haas School of Business; he he criticized it for voting in December to Summers, using a term
as Treasury secretary under Bill Clinton, lift the federal funds rate by a quarter of
former Harvard University president, a percentage point after seven years at
coined during the Great
and former head of Obamas National just more than zero. But thats an ordi- Depression, warns of
Economic Council. If anything, Yellen nary argument over how high to set the secular stagnation
seemed more likely to be an activist Fed monetary thermostat.
chair and would probably be more com- Summerss deeper argument is that
mitted to keeping stimulus in place until world growth is stuck in a rut because things, changing the tax code to get more
the economy was deinitely recovered, theres a chronic shortage of demand money into the hands of lower-income
Michael Feroli, chief U.S. economist at for goods and services and a concomi- and middle-class families whod spend
JPMorgan Chase, said at the time. tant excess of desired savings. The U.S. rather than hoard it.
But in November 2013, after Yellen and other industrialized nations tend to This, of course, sounds a lot like the
was chosen but before she replaced save more as their populations age, he agenda Obama has been pushing unsuc-
Ben Bernanke as chair, Summers went says. Meanwhile, growing inequality puts cessfully for the past eight years. To
to the International Monetary Fund in a bigger share of the worlds income in me, it looks like an opinion masquerad-
Washington and raised the specter of the pockets of rich people; they cant ing as a theory, Arnold Kling, a former
secular stagnation, a term coined in spend everything they make, so they Fed economist, wrote on his blog in
the Great Depression by Harvard econ- save it. The investment that would ordi- 2014. Congress shows no interest in any
omist Alvin Hansen, who lamented sick narily soak up those savings is falling measure that smells like iscal stimulus
recoveries which die in their infancy, and short. Thats partly because the new especially now, with lawmakers hiding
depressions which feed on themselves economy is asset-lite: Companies such under their desks until after the election.
and leave a hard and seemingly immov- as Uber and Airbnb prosper by exploit- Summers responds that his prescription
able form of unemployment. Secular is ing assets (cars and houses) that already is separable from his diagnosis; conserva-
econospeak for long-lasting, as opposed to exist. Software, which is pure informa- tives might prefer to ix the problem with,
cyclical. Hansens warnings about secular tion and doesnt require the construction say, export promotion, the elimination
stagnation seemed to be disproved when of factories, accounts for a bigger share of wasteful regulations, and big tax cuts
U.S. growth accelerated in World War II of the economy. Slow growth in output to induce companies to build factories.
and then remained strong after the war and productivity reduces investment as Summers has been getting more of
stimulus ended. executives lose faith in the payof from a hearing from central bankers around
For Summers, bringing the idea of capital spending. the world. His message to them: Think
secular stagnation back into the academic Exhibit No. 1 in Summerss case: bigger. The Fed traditionally restricts
debate was like putting on a moldy old Interest rates have been trending down itself to managing the business cycle 13
coat from Grandpas attic. But revive it he for 30 years, even after taking into luctuations of output around a supposed
did. Now, this may all be madness, and I account the decline in inflation. The long-term upward trend. Summers ques-
may not have this right at all, he told the interest rate, like any price, reflects tions the very existence of a business
IMF audience, before coming around to supply and demand. Its fallen because cycle, an inherently optimistic concept
saying, we may well need, in the years the demand for loans is weak and the implying that what goes down must come
ahead, to think about how we manage an supply of loans from savers, who have up. When output declines, his research
economy in which the zero nominal inter- extra cash to deploy, is strong. It used to shows, it never quite gets back to its orig-
est rate is a chronic and systemic inhibitor be thought that interest rates couldnt go inal trajectory. Productive capacity sufers
of economic activity, holding our econo- below zero, but the Bank of Japan and the lasting damage, in part because laid-of
mies back below their potential. European Central Bank, among others, workers lose skills. That makes it imper-
In other words, Summers claimed are so desperate to kindle growth that ative to avoid a recession whenever pos-
world economies could be so imbalanced theyve pushed some rates below what sible. Yet Summers says the odds of a U.S.
that even zero interest rates would be too used to be called the zero lower bound recession in the next three years are sig-
highand for many years, not just briely into negative territory. niicantly better than 50-50.
as economists had believed. The speech lit Despite opposing the Feds December Lately, hes added the idea that
up the Twitterverse and drew heavy news hike, Summers continues to worry that an secular stagnation is infectious, spread-
coverage. Journalists attention has waned extended period of ultralow and even neg- ing between countries by trade and invest-
a bit, but Summers has kept developing ative rates will cause bubbles in assets like ment lows. A stagnant country can try
the concept on his blog, in his Financial stocks and housing, as desperate inves- to cure its unemployment problem by
Times columns, in speeches, and in papers tors chase after higher returns. He says pushing down the value of its currency
written with other economists, includ- iscal policy needs to play a much bigger and running a big trade surplus; that
ing Browns Eggertsson, whos translated role than it has. How? On the investment worsens unemployment in its trading part-
Summerss thinking into the formal lan- side, he favors government spending to ix ners, which sufer trade deicits, according
guage of general-equilibrium economics. Americas dilapidated roads and bridges, to recent work by Eggertsson, Summers,
The real world is helping Summerss case. combat global warming, and improve and others. Beggar-thy-neighbor trade
The longer stagnation lasts, the more it educationbig, expensive projects that theory, in other words, is alive and well.
looks secular rather than just cyclical. would provide value while soaking up Summers argues that central bankers
Ive come to a growing conviction that excess savings. A favorite line: The should stop focusing on the business
the theory is right, he says. United States right now has the lowest cycle, stop jealously guarding their
To be clear, Summers is challenging infrastructure investment rate that it independence, and work with other
much more than when and how much has had since the second world war. On institutions to solve the deep prob-
the Fed should raise interest rates. True, the savings side, he favors, among other lems that have gotten the economy into
Opening Remarks
this condition. Central banks like to Summers: Even people who dont like demand growth can itself damage the
sayWell, yeah, productivity growths to use the term secular stagnation are supply side of the economyi.e., the
a problem. Thats not our problem, accepting new realities of excess saving people and machines who make stuf.
though. Inequalitys a problem. Thats relative to investment, very low rates, and Unemployment causes workers skills
not our problem, though, Summers chronic demand shortfall. to atrophy; companies stop investing in
said in a question-and-answer session One big fact is hard to square with equipment and software.
after his Peterson talk. I would suggest Summerss idea that the economy sufers Strengthening demand can turn that
that no major central banker in the world from a shortfall in demandnamely, the vicious circle around and gradually raise
is seriously engaged with this as an issue. 5 percent U.S. unemployment rate. If the economys productive potential,
The Federal Reserve System employs Americans spend a lot more, as he desires, Summers says. Far from crowding out
more Ph.D. economists than any other there might not be enough workers avail- private investment, government spend-
organization in the world, so it would able to handle the demand. The result ing could induce more of it.
seem to be an ideal place to bang out big could be a bidding war for talent, climbing When interest rates can go negative,
ideas about secular stagnation. But Fed wages, and unacceptably high inlation. all of the verities in economics are up for
economists tend to focus on short-term Princetons Alan Blinder, a former grabs. Economists joke that the questions
forecasting and the mechanics of mon- Fed vice chairman, is one of a group of on their doctoral exams havent changed
etary policy, says Petersons Posen. Yellen economists who argue that economic in 50 years, but the answers have. The
cant aford to indulge in blue-skying. Her stagnation emanates from weak supply, joke captures a truth, Summers says.
most important job is to move the rate- not weak demand. When I go to sleep He seems to relish being in the midst
setting Federal Open Market Committee at night worrying about the economy, of the upheaval. Thats the efect of
along by baby steps, maintaining as much Im never worrying that Americans living backwards, the White Queen told
of a consensus as possible among hawks wont spend enough, he says. Robert Alice in Wonderland. It always makes
and doves and being careful not to sur- Gordon of Northwestern University sim- one a little giddy at irst.
prise the inancial markets. If youre a i
ilarly says growth is impeded
member of a central bank committee, let b a lack of innovationa
by
alone the chair, every word gets scruti- s
supply-side explanation.
nized, Posen says. Summers, no surprise,
On the narrow question of where rates h an answer to those objec-
has
14 are headed, the Fed is gradually drift- t
tions. He says there may be
ing in Summerss direction. The median m
more slack in the labor market
projection by rate setters of where the t
than is sometimes recognized.
federal funds rate will eventually settle A
And he says the demand-
has come down a full percentage point, to s
side and supply-side expla-
3.25 percent, since the Fed began releas- n
nations for stagnation arent
ing projections in 2012. But Yellen, unlike m
mutually exclusive: Weak
Summers, isnt calling on Congress to amp
up stimulus. In a speech in November
at the Banque de France, she said con-
tractionary tax-and-spending policy was
hardly ideal, but gave iscal authorities
an out by saying they had to take long-
term sustainability into account.
Yellen has tiptoed around secular
stagnation, referring to the theory but
not endorsing it. Her right-hand man,
Vice Chair Stanley Fischer, who taught
Summers, Bernanke, and European
Central Bank President Mario Draghi
at MIT and once ran Israels central
bank, seems more open to the idea that
something fundamental has changed.
Speaking to academic economists in San
Francisco in January, he referred to the
secular stagnation hypothesis, force-
fully put forward by Larry Summers in a
number of papers. He agreed that inter-
est rates will likely remain low for the
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WCS-2377122 (04/16)
Bloomberg To read Timothy L.
OBrien on Donald
Trump, king of debt,
View and Adam Minter
on why we should get
rid of the TSA, go to
Bloombergview.com
cases against oicers implicated in Venezuelas burgeoning to pomegranate, only increases their appeal to kids.
drug trade. Its also targeted a handful of oicials with asset The FDA is starting a yearslong process to evaluate the ingre-
freezes and visa bans for engaging in political violence and acts dients in various e-cigarette brands. Its at least banning the
of public corruption. However, if the U.S. leads the charge, it sale of vaping products to minors, though most states already
would only validate Maduros anti-Yanqui narrative. So the U.S. do that. E-cigarettes are readily available to teens online.
i r t c w ly t -
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REITLING C M
Global
Economics
May
18
such restrictions. U.S. authorities have tance, says Guy, a former U.K. ambas- are suing NatWest, a unit of Royal
levied billions of dollars in ines against sador to Yemen and Lebanon. Bank of Scotland Group, for providing
Standard Chartered, HSBC Holdings, Banks have also closed accounts for banking services to a Palestinian
and BNP Paribas for violating sanc- hundreds of money-transfer outits charity linked to Hamas by the U.S.
tions on pariah nations in recent years. that wire $582 billion a year in remit- Department of the Treasury.
As a result, the banks have stopped tances from migrant workers to their The Obama administrations use of
sending money to certain countries families back home. Mark Carney, sanctions to punish Russia and Iran
and have even closed accounts of cus- governor of the Bank of England and has triggered an explosion of new
tomers who do aid work in perilous chairman of the Financial Stability standards and regulations dictating
places. The Charity Finance Group, Board, has warned about the inancial what banks can and cant do when
a trade association in London with abandonment of entire countries. serving clients. Banks are taking the
1,350 members, says 200 to 300 orga- The U.S. has shut charities for safest course and simply shutting the
nizations have had their accounts can- funding terrorism in the past decade. accounts of customers who pose even
celed or endured long delays and In 2009 ive leaders of the Holy the slightest risk. What we are seeing
rejections of money transfers. Land Foundation for Relief and is a rational reaction to increased
The new oil minister of Fires in Canadas
Saudi Arabia is a Saudi oil region threaten
Aramco veteran 20 the economy 21
19
money. But the bank couldnt get Saudis Still Prevail He will probably preside over the
comfortable with the charity sending Crude oil production at months announced Saudi Aramco initial public
money into Syria. Moreover, Christian end, barrels per day Record ofering. The IPO is essential to the
high 12m
Aid planned to rely on hawala, a deputy crown princes plan to build
centuries-old system of moving cash up the inancial resources needed to
Saudi Arabia 10m
around the Muslim world that oper- wean the country of oil eventually.
ates outside formal banking channels. $119 Defending Saudi oil policy means
Under hawala, someone in London 8m al-Falih will face opposition when he
who wants to send money to a rel- represents his country for the irst time
ative in Syria visits a local broker, 6m at the OPEC meeting on June 2. The
$48
hands over the cash, and, in return, U.S. Brent crude Iranians refused to honor a production
receives a code. The relative uses this price per barrel 4m freeze that Saudi Arabia and Russia
code to collect the funds at the other 4/2012 4/2016 proposed, and the Venezuelans are in
end, and the two brokers settle at DATA: U.S. DEPARTMENT OF ENERGY; BLOOMBERG
such poor inancial shape they need a
some later date. price of almost $100 a barrel to stabi-
Charities use hawala because its of the same for Saudi policy, that lize their economy.
often the only way of getting cash into could allow prices to continue follow- With the Iranians intent on produc-
a country that doesnt have a function- ing their gradual trend upward, says ing lat out, Saudi Arabia cant aford
ing banking system. But since Sept. 11, Edward Bell, a commodity analyst at to hang back. Al-Falih wont bend to
U.S. authorities have targeted some Dubai bank Emirates NBD. the desire of OPEC members such as
hawala networks for helping terrorists Saudi Aramco stands ready to meet Venezuela, Ecuador, and Algeria to cap
move money. They are not prepared demand from customers this year as output in a bid to raise prices much
to take any risk inside Syria, says Guy, global consumption rises by 1.2 million higher, says Ed Morse, Citigroups
who had to ditch the ield-kitchen barrels a day, Chief Executive Oicer global head of commodities research.
project. Thats their right. Its just Amin Nasser told reporters at company Saudi Arabia, he says, will look at the
disappointing. Gavin Finch and headquarters on May 10. Nasser suc- national interest in producing to gain
Edward Robinson ceeded al-Falih last May. OPECs Saudi- markets and market share.
led production increase will probably Al-Falihs full title is minister
The bottom line Charities such as Oxfam working
20 in war zones are having trouble transferring money: force 700,000 barrels a day of high-cost, of energy, industry, and mineral
Banks dont want to fund terrorists accidentally. non-OPEC crude of the market in 2016, resources. Hell have to analyze pro-
mainly U.S. shale oil and Canadian oil posals to break up the national power
produced from tar sands, says the Paris- utility to bring in more private com-
based International Energy Agency. panies and boost competition, an
Saudi policy has helped send prices issue al-Naimi didnt have to deal with.
Energy more than 60 percent higher since Anthony DiPaola, Nayla Razzouk,
January, to above $45 recently. and Wael Mahdi, with Javier Blas and
Saudi Arabia Gets a Al-Falih was drafted to head the Deema Almashabi
New Oil Czar health ministry last year. The min-
The bottom line Khalid al-Falih, Saudi Arabias new
istry was in need of restructuring. oil minister, pledges oil production will stay high, as
Yet on trips to the U.S. and the the kingdom expands market share.
Khalid al-Falih, ex-CEO of Saudi
World Economic Forum in Davos,
Aramco, becomes the oil minister
Switzerland, al-Falih was asked to
The appointment could signal expound more on stability in the oil
more of the same for Saudi policy markets than on improving domestic
medical services. Tawiq al-Rabiah, Lenders
Saudi Arabias new oil minister, Khalid former commerce and industry minis-
al-Falih, landed his job on May 7 ter, replaced al-Falih as health minister.
China Decides Debt
Can Be Dangerous
FROM LEFT: HAMAD I MOHAMMED/REUTERS; DARRYL DYCK/BLOOMBERG
430 Number
of firefighters
21
-1 .6%
and speeches upholding Panamas
ethical standards.
The campaign was triggered by the
leak of 11.5 million documents from
Panama law irm Mossack Fonseca
that revealed much about the way cor-
porations and individuals hide money
in ofshore companies. On May 9 the
same investigative journalism center
that released the papers provided
access to a searchable database. Year-over-year drop in th
Even as Varela has called for more Index of Consumer Expectations. The April reading
reects a gloomy outlook for growth.
transparency, hes resisted pressure
from the Organisation for Economic
Co-operation and Development to
automatically share bank account The initial reaction by Panamanians gray list shows money
information with foreign tax author- to the papers was a nationalist outburst laundering is largely
ities. Such measures have been that united even the worst of enemies. a thing of the past (the Task
embraced, at least in principle, by Says ex-President Ricardo Martinelli, a Force is an international body that
other locales such as Switzerland, bitter rival of Varelas since the former combats money laundering, and
Bermuda, and the British Virgin allies had a falling out: Its going to hurt its list names the uncooperative
Islands, where Mossack Fonseca incor- Panama. These people who are looking nations); know your client rules
porated most of its shell companies. to hide money, they dont want these have forced Panama irms to boost
Instead, Varela has said reforms crack- problems. Its an attack on Panama. due diligence; Panama fares better
ing down on money laundering were That the U.S. hasnt signed up for than Japan, Germany, and the U.S. in
well under way. Panamas success the automatic exchange of banking the watchdog Tax Justice Networks
24 does not depend on irregular lows of information rankles many of Panamas ranking of inancial transparency.
money into our inancial system, he defendersincluding the corporate Morgan often refers to a book on
told U.S. oicials including Secretary lawyers who make up the ofshore his desk by Australian academic
of State John Kerry at an event in company industry in the country. J.C. Sharman, The Money Laundry:
Washington on May 3. Nonetheless, on Mossack Fonseca is among many Regulating Criminal Finance in the Global
May 11, Panama could no longer resist other irms whose partners made Economy. In an experiment, the author
the pressure from big proits from the sale of shell com- found it easier to form a shell company
Panama GDP the OECD and panies. Partner Ramon Fonseca was in the U.S. and other developed
growth agreed, in princi- until recently an adviser to Varela. countries without proof of identity than
14% ple, to automati- The law irm declined to comment. in emerging markets such as Panama.
cally share bank Eduardo Morgan Jr., the senior Panama is just one of many in the
account informa- partner of a Panama City-based business of creating ofshore com-
7% tion with foreign law irm with oices in 17 jurisdic- panies, Morgan says. And Mossack
tax authorities. tions and double the workforce of Fonseca isnt the only irm with shell
The Panama Mossack Fonseca, has been a justice companies linked to politicians. A
0% Papers, which minister and an ambassador to search in Panamas public registry
2001 2015 Mossack Fonseca Washington. His father opened one of shows two ofshore entities with ties to
says were Panamas irst irms for incorporating relations of Eduardo Paes, the mayor
obtained by a hacker and then leaked ofshore companies in 1923, although of Rio de Janeiro. The shell companies,
by the International Consortium of the 100 lawyers at Morgan & Morgan at which family members are directors,
Investigative Journalists, provide now focus largely on litigation. werent part of the Mossack Fonseca
a glimpse into decades of deals by Morgan is an unoicial spokesman leak. Paes says his father set up the
a major creator of ofshore com- for Panamas law irms, appearing companiesand has always paid his
panies. According to a poll by local on local TV and talking with foreign taxes in full. The registered agent of
DATA: BLOOMBERG; UNIVERSITY OF MICHIGAN
research group Dichter & Neira, media. The OECD wants to govern these businesses? Morgan & Morgan
most Panamanians fear that the the world, he says sitting in his oice in Panama City. The irm declined to
fallout from the scandal will hurt the in a Panama City skyscraper he owns. comment. Blake Schmidt
economy, which is already slowing (He also owns a stake in a Bahamas
The bottom line Panama protests being smeared
from double-digit growth. Some bank.) The OECD says Panama has to by the Panama Papers even as it tries to defend its
Panamanian Twitter users have even sign, but the U.S. didnt sign, he says. ofshore company industry.
tried, and failed, to wipe the countrys Morgan echoes many of Varelas
name from the scandal by rebranding arguments: Panamas removal from Edited by Christopher Power
the afair as #MossackFonsecaPapers. the Financial Action Task Forces Bloomberg.com
GET THE
FACTS
openourskies.com
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Companies/
Brazilian business in a Kicking up dirt over
holding pattern 28 a new breed of flower
30
The
Administration chief Mark Rosekind
announced on May 4 that the size
of the largest auto recall in U.S.
history was about to double, he also
revealed that this safety action hits
close to home. Like tens of millions of
Longest
American cars, his is equipped with
a potentially deadly Takata air bag,
one that wont be ixed anytime soon
because parts arent available. The
vehicle is parked in his driveway. I
tell my wife and kids the same thing
were telling everyone else: For all
Recall
the frustration, make sure youre
safe, he says.
Frustration may be an understate-
ment. Millions of owners of 17 difer-
ent car brands are likely to be in the
same boat as the industrys top reg-
ulator: learning their personal vehi-
cles could actually kill them should
an unstable air bag inlator explode
in their faces, then told to wait their
turnperhaps for yearsuntil replace- 27
ment parts are available.
The situation is particularly galling
to many owners who had assumed that
the slow drip of information regard-
ing problems with Takata bags over
much of the past decade meant the
problem
bl was being
b i g
3 ,800
63 ,000
addressed. Id heard about
the recall on Honda Accords and
such, which started, like, back in 08,
says an exasperated Carter Fawcett,
whose 2012 Acura TL is on a 300-
vehicle waiting list at a dealership in
Salt Lake City. Only one customer has
completed the repairs there so far, he
was told. I thought for sure they had
igured it all out and werent selling
defective air bags after earlier recalls,
he says. Its really stupid.
There have been other high-
ILLUSTRATION BY 731
The Takata air bag recall hits 64 million vehicles. Its not over yet proile recalls over the years, such
as General Motors faulty ignition
I thought for sure they had gured it all out. Its really stupid switches in 2014 and Toyotas sudden-
acceleration woes in 2010. But
Companies/Industries Top Auto
Recalls
theres never been an auto safety expansion to help restore public coni- In the meantime, some dealers are
scandal that unfolded as slowly, delib- dence. Our actions demonstrate our ofering customers loaner cars. NHTSA
erately, and then seemingly geomet- total commitment to safety and our chief Rosekind couldnt get one, even
rically as this one. Rosekind says that intention to be part of the solution, though his agency looked into the
a large percentage of the U.S. vehicle Chief Executive Oicer Shigehisa possibility of ordering automakers to
population need to be replacedcars Takada said in the statement. ofer loaners to all afected American
equipped with about 67 million inla- The mess started with a recall of owners. The government, NHTSA
tors. But even that understates the sit- just 3,940 Honda Civics and Accords learned, didnt have the authority.
uations magnitude. Takaki Nakanishi, in 2008. Three years later, the action If we could have done it, we would
a Tokyo-based auto analyst for was still conined to drivers-side have, Rosekind says. That would have
Jeferies, igures that Japan and other bags on fewer than 3 million Honda- made things a little simpler for worried
nations are likely to follow the U.S.s produced vehicles. In 2014 the auto- vehicle owners. But with the Takata air
lead and expand their own recalls, maker recalled 2.8 million vehicles and bag debacle, nothing has been easy.
adding 55 million inlatorsfor a total then, for the irst time, added 988,440 Jef Plungis, with Melissa Mittelman
of 122 million called back globally. cars and trucks to ix passenger-side
The bottom line U.S. regulators have more than
Of the four makers of air bag bags. That was the irst time Honda doubled the number of Takata air bags to be
inlators worldwide, only Takata uses and Takata suggested that climate recalled. The work wont be nished until late 2019.
an ammonium nitrate chemical com- could be a factor, with the recall being
pound to produce a controlled explo- concentrated in high-humidity states
28 sion to launch the bag during a crash. along the Gulf Coast. It then became
The chemicals have proved to become a multiple-automaker problem, with
unstable over time, especially under Toyota, Nissan, BMW, Chrysler, Investment
humid conditions, and 13 people have Ford, Mazda, Mitsubishi, and
been killed in the U.S. and Malaysia Subaru joining in.
Corporate Brazil Wants
after their Takata bags unintention- Subsequently, NHTSA opened a To Breathe Again
ally deployed, sending shrapnel into defect investigation in June 2014, and
drivers or passengers. a congressional investigation started
The impeachment crisis has
Replacing the bags has been slow in October. Takata executives pub-
put of key business decisions
going because the design of a bag is licly apologized at a Senate hearing in
unique to each car model. That means November. Still, the company resisted It becomes clear that she has no
producers of replacement bags must NHTSAs calls to go even further. So solution to present to us
tool up to manufacture scores of difer- on May 19, 2015, NHTSA announced
ent inlators suited to the exact conig- a national recall, along with a legal The drawn-out political drama over
urations of various steering columns order to enforce the agreement. The the ouster of President Dilma Roussef
and dashboards. next day, so many panicked consumers of Brazil has sent local stocks reeling
FROM LEFT: EVARISTO SA/GETTY IMAGES; PHOTO ILLUSTRATION BY 731; GETTY IMAGES (2)
In a May 4 statement in response tried to log on to check their vehicles and recovering again and again. On
to NHTSA expanding the recall, that they crashed the governments May 9, investors, whod already fac-
Takata said it wasnt aware of any rup- auto recall website. tored in a transition period under
tures in the inlators involved in this NHTSA took over management of Vice President Michel Temer, were
latest recall, either in the real world the recall last November, enlisting the spooked when the impeachment
or in the test lab, nor was it aware three other air bag suppliersAutoliv, process was briely put into doubt
of any new data or scientiic analy- ZF TRW Automotive Holdings, and by a legislative maneuver. After that
sis that suggested substantial risk Daicelto help make replacement was ironed out, the march toward
for vehicle owners. It nevertheless inlators. As of April 22, automakers Roussef s trial and likely removal
agreed to accept and support the had repaired 8.2 million of the irst from oice pressed on, and stocks and
28.8 million recalled, about 28 percent the Brazilian currency rallied.
of then-afected vehicles. And that With political gridlock paralyzing
The biggest auto recall was after theyd been at it for a couple the nations capital since last year,
of years. Now, with the recall more corporate Brazil has been living with
ever has been slowed by than doubling, NHTSA hopes to com- uncertaintyand thats been bad for
an inability to get enough plete the replacements by the end of business. Although executives have
replacement parts the decade. been reluctant to take sides publicly
Companies/
in the debate over the charges against Delim Netto, a former inance minis- and logistics
Roussef (using state-run banks to ter and longtime economic adviser to company. It ends
cover up a budget gap, an alleged top Brazilian politicians. The vice pres- up hurting the worker
breach of a iscal responsibility law), ident is expected to enact more busi- himself, since you think twice
theyve bemoaned the lack of clear ness-friendly policies than Roussef, about hiring anybody.
governmental policies. Bureaucrats whose Workers Party has resisted mea- Temer has other challenges. Hes
have been sitting on their hands as sures that could sacriice protections for almost as unpopular with the masses
Roussef s government and the coun- labor. Temer is likely to replace current as Roussef, and the scandal thats
trys lawmakers ran from ring to ring Finance Minister Nelson Barbosa, sinking her administration over
in the impeachment circus. If you the third such change in the post in Petrobras, the national oil company,
hear absolutely nothing from the pres- 18 months. The people that are coming has ensnared some of his allies. If his
ident regarding what concerns us the in know what needs to be done, and reforms are seen as harmful to the
most, which is a year and a half of the they know it needs to be done quickly, poor, he may provoke demonstrations
economy at a halt, it becomes clear says Paulo Bilyk, chief investment and protests. Fabiola Moura, Gerson
that she has no solution to present to oicer at Rio Bravo Investimentos. Freitas Jr., Anna Edgerton, Arnaldo
us, says Antnio Emlio Fugazza, chief Srgio Fischer, chief execu- Galvao, and Cristiane Lucchesi
inancial oicer at homebuilder Eztec tive oicer of Log Commercial
The bottom line Companies have been stalled as
Empreendimentos e Participaes. Properties, a real estate company the Roussef impeachment paralyzes the Brazilian
At the top of the corporate list of based in Belo Horizonte, says there government and important reforms.
concerns are tax and labor reforms are indications that business will pick
that executives say will help them hire up once Temer steps in. Im already
and invest more. There are also more feeling it, he says. Weve been
speciic measures that afect indus- getting requests, big ones, from com-
tries from telecom to auto manufactur- panies who are already considering a Autos
ing. Oi, the struggling phone carrier, better scenario in the future.
has been waiting for months for an Once her impeachment trial begins,
Why Tesla Scares
overhaul in regulation that would free Roussef must temporarily step down. German Carmakers
it from investing in outdated, money- The Senate has almost six months
losing ixed phone lines. The proposal to make a inal ruling. If a two-thirds 29
Its $35,000 Model 3 could lure
has been stuck between the communi- majority votes against her, Temer
luxury car shoppers
cations ministry and Anatel, the indus- would continue as president until 2018.
trys governing body, which says it For now, Temer says he wants to The innovation hat is going to
needs more study. use his interim mandate to ease rules move to a new place
Automakers saw car sales fall about on government procurement and give
28 percent for the irst four months the private sector a bigger role in the Audi, BMW, Mercedes-Benz, and
of 2016 from a year earlier, on top of oil industry. His plans to eliminate a Porsche have long dominated the
a 27 percent full-year drop in 2015. third of ministries are being scaled worlds premium automotive ranks,
Theyve been waiting since last year for back, and tax increases have been making Germany home to some of the
the government to sign a plan to give ruled out for the time being, accord- industrys most proitable car brands.
consumers incentives such as rebates ing to two Temer aides, who asked not But Tesla Motors, whose Model 3
to upgrade their vehicles. to be identiied because the discus- electric car enticed 325,000 would-
If Temer does step into a caretaker sions arent public. be buyers to put down $1,000 depos-
president role, his long experience in Brazil will eventually need to deal its during the week of its debut in
Braslia should ensure he has the clout with longer-term structural issues. Its April, threatens them in a way that
to quickly address the crisis of eco- corporate tax rate is 34 percent, among Toyotas Lexus never did. While the
nomic growth, according to Antnio the highest in the world. And its labor Model 3s stats200 miles on a single
laws are notori- charge,$35,000 starting pricealign
ously restrictive, it with General Motors midmarket
with enforced Chevrolet Bolt, Tesla Chief Executive
working hour Oicer Elon Musk has said his most
limits and a afordable car to date should be
30 percent thought of as competing with luxury
extra payment mainstays such as BMWs 3 Series or
for vaca- the Audi A4.
Roussef
tion time. It Car shopping data suggest theres
stiles any entre- more to Musks claim than just
preneurship, bravado. Tesla buyers shop German
says Fernando luxury brands more than any other
Simes, CEO car lines before making purchase
Temer
of JSL, a cargo decisions, according to automotive
transportation researcher Edmunds.com. Almost
Companies/Industries
High-End Overlap Model 3 in late 2017. Technologywise, sufered at the hands of a U.S. lower
Share of Tesla shoppers in March who also things will probably move back to the breeder and marketer in a recent trade-
looked at these brands U.S. to an extent after Europe was the mark and patent infringement lawsuit.
center of premium carmak- Westhoff developed a flower called
BMW 27.6% ing for the past 30 years, says Candy Bouquet, a magenta-and-yellow
Toyota 23.2% Volvos Samuelsson. variety that looks like a small petunia.
Audi 20% Thats in part why Porsche said In a lawsuit filed on May 4 in federal
Honda 19.3% in December that within ive years district court in Pittsburgh, Westhoff
Mercedes-Benz 19.2% it will build its Mission E, a fast- claims California-based distributor
Ford 17.2% charging, four-door luxe sports car Proven Winners copied the variety,
Lexus 16.3% that will target Teslas Model S sedan. then interfered with Westhoffs sales
Chevrolet 16% Audi plans to build its electric E-tron efforts, derailing a deal to sell the
Nissan 12.4%
Quattro SUV as a direct rival to Teslas flower to Home Depot, the worlds
Porsche 11.6% Model X SUV. And Mercedes is plan- largest home-improvement chain.
Subaru 11% ning four EVs to take on Tesla. In the process, Westhoff alleges that
Mazda 10.6% Tesla doesnt have to sell huge Proven Winners maligned the German
Acura 10.4% numbers of the Model 3 to begin hurting breeders reputation.
Hyundai 10% both demandand proitability Candy Bouquet is a variety of the
Volkswagen 9.6% of traditional luxury brands. Thats South American plant called calibra-
Volvo 8.5% because until the German marques choa, informally known as million
Kia 8.5% launch their competing EVs, they may bells or little petunia because of
Cadillac 8.3% have to cut prices to avoid losing market its resemblance to the better-known
German
Jeep 7.6% luxury cars share to Tesla or trim production to annual. The plant is gaining in popular-
Infiniti 7.5% match lower demand. ity, with $44.6 million in sales in 2014
Land Rover 7.5% Competition from the Model 3 might in the U.S. for calibrachoa, compared
Jaguar 7% prompt German carmakers to drop with $29 million in 2009, according to
Dodge 5.9% some prices as much as 10 percent to U.S. Department of Agriculture figures.
Buick 4.9% defend their U.S. market share, says The flowers are considered easy to
Lincoln 4.7% Stuart Pearson, an analyst at Exane BNP grow, come in a variety of colors, and
30
DATA: EDMUNDS.COM
Paribas. Tesla is aiming the Model 3 produce blooms from spring to fall.
at those looking to spend roughly Proven Flowers and other plants
30 percent consider BMW, and $40,000 on a car, and thats the core Winners th ppear in nature cant
p
Holy Moly
about 20 percent look at Audi and target market for BMW and Mercedes pat nted. Instead,
Mercedes models, while 12 percent basically, he says. The fact is they co panies develop
shop Porsche, says Edmunds. dont really have an answer to the ieties through graft-
Compare that with the fewer than Model 3 until the next decade. g or budding and
6 percent of Tesla buyers who con- David Welch and Elisabeth Behrmann oobtain patents under
sider a Dodge, and its clear German tthe 1930 Plant Patent
The bottom line Teslas Model 3 could draw sales
brands are most vulnerable to cus- from German luxury carmakers bread-and-butter t for ones that
tomer defections as Tesla grows. vehicles, prompting price cuts. produce asexually,
Executives at rival carmakers pri- out seeds.
vately squawk about Teslas poor track re than 375 patents
record of manufacturing delays and ve been issued for
persistent inancial losses. Yet they alibrachoa variet-
cant ignore that Musks products are Gardening ies, according to
exciting consumer passions in a way data compiled by
that incumbent automakers havent for
A Fight Over loomberg. Westhof
decades. The innovation hat is going Petunia Look-alikes has 28 of those, includ-
to move to a new place, says Hkan Westhofs
ing the Wescacandy
Samuelsson, CEO of Volvo Cars. The Candy patent for Candy Bouquet
A German breeder says a U.S. Bouquet
decisive factor is whats happening issued last December.
distributor stole its bloom
inside peoples heads, says Jrgen After unveiling Candy Bouquet
Pieper, an analyst at Bankhaus Metzler. People are not gardening the at Home Depots vendor show in
Many see in Tesla the innovation way they used to February 2014, Westhoff claims the
theyre missing from the Germans. retailers reps expressed interest in
The Tesla advances and the threat The lower industry is about beauty being the exclusive seller of the flower
COURTESY TRIED & TRUE
of Apple entering the car business and fragrance. Its also illed with in North America. According to the
have led German brands to show lots intellectual-property theft, back- complaint, Westhoff says Proven
of electric concept vehicles recently. biting, and deceit. Thats what Winners, having seen the flower at the
But these cars are years away, while German plant breeder Westhof same trade show, tried to trademark the
Tesla plans to start delivering the Vertriebsgesellschaft claims it has name Candy Bouquet. The application,
As an entrepreneur, I want to deal with
entrepreneurial people who understand my
needs First Republic does just that.
A J AY ROYA N
Co-Founder and Managing General Partner
Mithril Capital Management
(855) 886-4824 or visit www.irstrepublic.com New York Stock Exchange Symbol: FRC
Member FDIC and Equal Housing Lender
Companies/Industries
1.6k
of items theyre selling
on EBay. Under a new customers. In blocking the deal, pop garden stores, and theres been
agreement, the online
marketplace and the U.S. District Judge Emmet Sulli- consolidation among distributors and
breeders as well. Annuals such as the
logistics provider will
share a commission on van handed a victory to the Fed- calibrachoa, petunia, and begonia are
each sale.
eral Trade Commission, which the moneymakers for garden sales,
although growth has started to slow
argued that the merged company would result in higher in recent years, says Marvin Miller,
manager of Ball
prices for companies buying supplies in bulk. Shares market-research Horticultural in West Chicago, Ill.,
in Gap plunged 13 percent on May 10 after the retailer CEO a global gardening company not
involved in the lawsuit. With fewer,
posted disappointing same-store sales, a Wisdom
bigger companies and slower sales,
FROM TOP: PETER POWER/GETTY IMAGES; CHRIS GOODNEY/BLOOMBERG
sign that a long-promised comeback hasnt there could be more flower fights.
People are not gardening the way
materialized. H Renaud Laplanche, hey used to, Miller says. The players
th
CEO of LendingClub, resigned from the re
ealize that when they want to grow,
hey have to do it at the expense of
th
online lender after an internal review found We still a competitor. Susan Decker and
think that
abuses tied to the sale of loans and a fail- the subscription Matthew Townsend
M
channel mo odel is
ure to disclose his personal interest in an going to dominate The bottom line Consolidation in the garden
the marketplace for industry could lead to more legal disputes over the
investment fund. The U.S. Securities and certainly the next rights to ower variety patents.
five years.
Exchange Commissions enforcement unit Robert Iger,
Walt Disney, on a Edited by James E. Ellis and
is reviewing the matter. May 10 earnings call Dimitra Kessenides
Bloomberg.com
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account value.
Kevins Problem?
tories in Europe. When managers broke
the news, there was a silver lining.
After discovering a federal program
called Trade Adjustment Assistance
(TAA) online, the local union presi-
dent applied to the U.S. Department of
Labor. The plant opened up its books,
and the government certiied the job
cuts as trade-related, which meant
workers could apply for TAA relief.
That was good news for Kevin
Tetreault, 41, who worked on the
plants coating machines, big as bas-
ketball courts. Hes getting government
grants to pay for an associates degree.
When hes inished, hell be certiied to
install and repair heating, ventilation,
and air-conditioning systems. Tetreault
now competes with his son to see who
gets the best grades, but the decision
to go back to school rather than take a 35
lower-paying job wasnt easy. To be
honest with you, he says, I debated I
think until the last week before we had
to sign of on everything.
Tetreault was luckier than most
workers in his position. TAA is a
small program. In 2014, according to
the Labor Department, 20.4 million
American workers lost their jobs. Of
those, 63,000 were eligible for TAA,
which ofers either retraining grants or
small wage subsidies to make up the dif-
ference for those who take lower-paying
work after their jobs vanish overseas.
When TAA was last reauthorized, in
June 2015, Congress approved a budget
of just $450 million annually until 2021.
Politicians often say the U.S. should
retrain manufacturing workers who
lose their jobs to foreign competitors.
But TAA is all that Washingtons ofered.
As the volume of trade has grown, espe-
cially with China, the programs short-
comings have become clear. Its vastly
inadequate and improperly designed,
says Matthew Slaughter, a trade econ-
omist and dean of the Tuck School of
YOON S. BYUN/BLOOMBERG
Business at Dartmouth.
Congress has a (small) program for people affected by trade Introduced in 1962 as a complement
to the Kennedy Round of tarif cuts,
Workers may need a little help getting back on their feet TAA was reduced dramatically under
President Reagan. Until the 1990s,
To be honest with
Politics/Policy you, I debated I
think until the last
week before we
had to sign of on
not much assistance was nec- everything. new jobs paid less. When workers let go after Alcoa idled two
Kevin Tetreault,
essary. The U.S. was trading whos going to industries move overseas, smelters in Washington, a move the
with other developed coun- school on a TAA Reynolds says, pockets of company attributed to competition
tries, where wages and labor grant workers in the same geo- from producers in other countries.
regulations were roughly equiv- graphic region tend to be Presidential candidates have talked
alent and job losses because of put out of work. As a result, about tradeBernie Sanders wants
trade were actually less than economic the efects of trade-related job losses less of it, Hillary Clinton says shell
models had predicted. Politicians ripple through local economiesa seek tougher terms, and Donald
in both parties were eager to pass problem TAA isnt designed to ix. Trump promises better deals. They
trade deals. Respectable opinion TAA also does nothing for workers want to train young people for the
was rooting for trade not to have any whose jobs evaporate for reasons other jobs of the future, but they arent
negative efects of any serious size, than trade. Until the late 1990s, one of talking about how to help those
says Barney Frank, a Massachusetts the best-selling products at the plant whove already lost their jobs.
Democrat who served in the House where Tetreault worked was clear Congress hasnt indicated any plan
from 1980 to 2012. acetate pages for overhead projectors. to consider changing or expanding
That changed with the signing of the Those have become obsolete. So while TAA. I dont mean to be the skunk in
North American Free Trade Agreement foreign competition played a role the garden party, says Slaughter, but
in 1993, under President Clinton. Diatec sent Tetreaults work to its plants I see nothing. Addressing the efects
Nafta was the irst trade agreement in Germany and Switzerlandthe brutal of trade requires experimentation with
we signed with a low-wage country, forward march of technology did, too. various approaches at the state level,
says Robert Lawrence, a professor of In 2007, Slaughter and Lawrence compromise at the national level,
international trade and investment contributed to a proposal to broaden and plenty of time, Slaughter says.
at Harvards Kennedy School. Then, TAA. Their goal was to expand wage Instead, politicians are ofering up the
in 2001, China became a member of insurance and retraining assistance specter of increased barriers and trade
the World Trade Organization, vastly for workers afected by technologi- wars, he says: Thats really scary.
increasing the competitive pressure on cal change and other factors as well as Brendan Greeley
low-wage U.S. manufacturing workers. trade. The cost: $22 billion. What we
The bottom line Congress has authorized
It is very diferent from the kind of really need is a broader adjustment $450 million annually for workers hurt by free trade,
36 trade competition you get when you system, Lawrence says. Slaughter, who but economists say new approaches are needed.
have similar wages, Lawrence says. was then on President George W. Bushs
Economists have only recently begun Council of Economic Advisers, invited
to understand how trade with low-wage Frank to Dartmouth to talk about
countries afects workers in wealthy it. Then, in 2008, the inancial crisis
ones. In a 2013 paper for the American struck, and both Frank and Slaughter Election 2016
Economic Review, economists David had other things to worry about.
Autor, David Dorn, and Gordon Hanson Democrats have lately been more
#NeverTrump and
found that in regions most afected concerned with setting limits on Bernie Bros for Hillary
by trade, the majority of federal assis- the terms of major trade deals, such
tance comes from increased Medicaid, as President Obamas Trans-Paciic
Tech execs have cash, but Hillary
Medicare, and Social Security disabil- Partnership, than on increasing
needs their social networks, too
ity payments. Transfers from TAA, they funding for TAA and other assistance
wrote, are negligible. programs for U.S. workers who lose Obviously there are a lot of
Kara Reynolds and John Palatucci out. Even the very best TAA program business relationships there
of American University looked at data cannot make up for bad trade policy,
from the Labor Department in 2008; says Ohio Democratic Senator Sherrod In 2012 venture capitalist Marc
they found evidence that TAA helped Brown. He helped push last years Andreessen publicly abandoned the
workers ind jobs after training, but the reauthorization through the Senate. Democratic Party, announcing that
This year, the conservative Heritage hed back Republican Mitt Romney.
Foundation argued that TAA should I turned 40 last year, and so I igured
Help for Workers Hit by Trade be cut altogether. Some Republicans, it was time to make the switch, he
TAA funding $2b however, see it as a valuable part of said in an interview with CNBC. He
SHAHAR AZRAN/GETTY IMAGES; ILLUSTRATION BY 731
THIS PAGE: JONES KNOWLES RITCHIE NEW YORK. OPPOSITE PAGE, FROM TOP TO BOTTOM: CHRIS TIERNEY/SUN PHOTO; GABE SOUZA/GETTY IMAGES; M. SPENCER GREEN/AP PHOTO
they seek higher pay and other conces- for entirely pedagogical purposes. year Harvard doctoral student in public
sions, including better health beneits, Columbia declined to comment further. policy. The administration at Harvard,
38 for the teaching and research they do Unionization among graduate stu- I guess its not surprising that theyre
while pursuing their degrees. dents at public universities has been not an exception. Josh Eidelson
The National Labor Relations Board widespread for decades because those
The bottom line Unions are targeting the wealthiest
is expected to rule sometime this student workers are treated as gov- universities in the U.S. to win higher pay and
summer. Katz and his co-workers ernment employees. In 2000 the benefits for graduate students who teach.
have petitioned to join the United NLRB, then dominated by President
Auto Workers. The AFL-CIO has also Clintons appointees, ruled in favor
weighed in on their behalf. Theyre of letting graduate students unionize
providing a service and receiving com- at New York University, the irst such
pensation, says AFL-CIO general victory at a private institution. That Civil Rights
counsel Craig Becker, who served on precedent was overturned in 2004,
the NLRB during President Obamas under President George W. Bush, when
Brother, We Can Ask
irst term. Its up to them to decide the NLRB rejected a unionization push You to Spare a Dime
whether, even though theyre also stu- at Brown. Being a graduate assistant
dents, they think they would beneit working toward a degree is not a rela-
A Supreme Court move bolsters
from collective bargaining. tionship thats primarily economic. Its
the rights of panhandlers
Columbia, which opposes grad primarily academic, says former NLRB
student unionization, has won support member Ronald Meisburg, who was You cannot declare a downtown
from all seven of its fellow Ivy League part of the majority that voted in favor zone a no-free-speech zone
schools, along with Stanford and MIT. of blocking unionization at Brown.
The schools joined together in February After that decision, NYU ceased to Don Norton and his wife, Karen
DATA: U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
to ile an amicus brief warning that recognize its graduate students union. Otterson, have been arrested about
collective bargaining would threaten Students iled a fresh unionization peti- 50 times while panhandling in down-
faculty authority over educational tion in 2010 to the NLRB, which sig- town Springield, Ill., over the past eight
decisions involving undergraduates naled it might be open to undoing years. In 2013 they sued Springield for
as well as teaching assistants. This is the Bush-era ruling and returning to infringing on their First Amendment
viewed as a fundamental issue of aca- the precedent set under Clinton. In rights to freedom of speech. The city
demic freedom, says attorney Joseph 2013, NYU allowed the UAW to estab- had passed an ordinance prohibiting
Ambash, who wrote the Ivies brief. lish a union that covered most of the verbal requests for money in the citys
In its own iling, Columbia com- students the UAW had asked to rep- historic district, just a short walk from
pared its graduate assistants to student resent. We felt there was a middle Abraham Lincolns home, tomb, and
interns at Fox Searchlight Pictures: ground, NYU Executive Vice President presidential library. A federal appeals
A federal court last year ruled the Bob Berne said at the time. We felt court took Norton and Ottersons
Politics/Policy
side and overturned the ban, and Seen, But Not Heard and homelessness that can lead to
in February the U.S. Supreme Court Homelessness in cities that have panhandling. The answer is not to
refused to hear the citys appeal. I kind enacted panhandling restrictions deploy the criminal justice system
of feel privileged that I was able to help to arrest people but to assure there
people have the right to do this, says are suicient resources to resolve
Norton, 55, who carries a cardboard the problem, says Maria Foscarinis,
sign asking for help. founder and executive director of the
His victory came thanks to a 2015 Washington-based nonproit National
ruling by the Supreme Court in which Law Center on Homelessness &
the justices agreed with the arguments Poverty, which advocates for policies
of Arizona pastor Clyde Reed, who that prevent and reduce homelessness.
wanted to put up signs directing people The popularity of panhandling bans
to Sunday services at his church. He jumped at the begin- Nationally,
challenged a local ordinance that put ning of the decade. homelessness
is down
strict time limits on signs providing The number of
11%
Lowell, Mass.
directions. Writing for the court, Justice cities with blanket
Clarence Thomas said the law treated bans increased
directional signs diferently from other
displays, such as those for political can-
didates. Under previous Supreme Court
21%
Increase in homeless
25 percent from 2011 since 2010
to 2014, according to a 2015 report from
the Law Center. Springield enacted
population since 2010
rulings, restrictions on speciic types its ordinance in 2007. Steven Rahn,
of speech were considered valid only if Springields attorney, says the city was
they were narrowly tailored to serve a simply trying to protect merchants eco-
compelling state interest. nomic interests. We dont think
Lower courts have taken the Supreme Court ever intended
Thomass reasoning to mean that to go with quite that broad of a
anti-panhandling ordinances ruling, he says.
unfairly suppress certain kinds Merchants would like there to
of speech. Theyve overturned be a respectful coexistence, says 39
anti-begging ordinances as well Lisa Clemmons Stott, executive
as others outlawing ballot-box director of Downtown Springield,
selies and robocalls for polit- a nonproit that promotes cul-
ical campaigns. Any law dis- tural and economic development.
tinguishing one kind of speech You cant have people urinat-
from another by reference to its ing in doorways and panhan-
meaning now requires a com- dling customers who are eating
Portland, Maine
pelling justiication, Frank lunch outside. Garret Mofett,
Easterbrook, a federal appeals who leads daily tours of the area
court judge, wrote in the
Springield case.
Bans in Worcester and Lowell,
16% dressed as Ward Hill Lamon,
Lincolns friend and personal
bodyguard, agrees: I dont call it
Mass., have been overturned panhandling. I call it harassment.
by lower courts, as have others in Norton agrees that aggressive pan-
Grand Junction, Colo., and Portland, handling poses a nuisance. He seeks
Maine. Similar ordinances are being donations by holding a sign, not ver-
challenged in New Hampshire and bally asking for money. Mark Weinberg,
Oklahoma. Other states and municipal- a Chicago civil rights lawyer who rep-
ities have since decided not to enforce resented Norton and Otterson, says
their laws because the Supreme theres no compelling economic inter-
Court refused to hear Springields est that justiies squelching free speech.
appeal. You cannot declare a down- Whats going on in Springield is
town zone a no-free-speech zone, broadly representative of cities around
says Ken Paulson, president of the the country, he says. For Girl Scout
First Amendment Center at Vanderbilt Cookies, its yes. For panhandlers, its
University in Nashville. You cannot no. Tim Jones, with Greg Stohr
Chicago
ban free speech, and so-called panhan-
The bottom line Cities that want to crack down on
dling is free speech.
9%
panhandling find courts siding with beggars after
Advocates for the poor say anti- the Supreme Court expanded rights to free speech.
begging ordinances criminalize
poverty and overlook the root prob- Edited by Allison Hofman
lems of mental illness, drug addiction, Bloomberg.com
HEALTH CARE
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Technology
Facing a slowdown, Amazon and Facebook
smartphone suppliers raise the bar on
try to diversify 42 stock compensation 44
41
Inside and out, the companys well-nanced streaming service has been a bit of a mess
When it comes to software, Apple performs with less elegance
At Apples annual developers At this years conference, Apple will Music, the streaming service it bought
conference last June, Chief Executive begin the marketing blitz for a vastly two years ago. An Apple spokesman
Oicer Tim Cook unveiled Apple diferent version of the streaming declined to comment for this story.
Music, a $10-a-month streaming service, say three people familiar with Cook is counting on services like
service meant to compete with the its development. Better integration Apple Music for good news as slowing
likes of Spotify and Pandora. Since with iTunes downloads; deeper online- iPhone sales batter the companys
then, Apple Music has received tepid radio playlists; an interface people stock. But such services, from Apple
reviews and achieved only a roughly might actually like. Apple has been Maps to iCloud to Siri, havent been
ILLUSTRATION BY 731
1 percent adoption rate among active slow to adapt to the shift from music its strong suit. When it comes to
Apple devices. Several of the exec- downloads to streaming, and this software, Apple performs with less
utives brought in to steer the music reset could signal an acknowledgment elegance. Apple Music is under-
strategy are gone. that its stumbled in integrating Beats whelming, says Colin Gillis, an
Rogers (far left) in 2013
with Beats executive Luke
Wood, Reznor, Iovine, and
Technology Beats co-founder Dr. Dre
along with Iovine and longtime Apple within a few months of the acquisition sales, the $423 billion smartphone
services exec Eddy Cue. despite the deals incentives to stay for industry can no longer count on con-
The bigger challenge may be Apples at least a year. The stafers who quit sumers to upgrade every two years.
fear of cannibalizing its valuable down- either declined to comment or didnt Warning signs of a sputtering market
load business. Annual revenue from respond to interview requests. spilled into the open at the end of April,
iTunes album and song purchases Rogerss departure was particu- when Apple announced its irst quar-
has held steady at almost $3.5 billion, larly troubling for many on the Music terly sales decline in 13 years, and
close to triple the revenue from Apples team. A skateboarder who got his research company Strategy Analytics
streaming subscriptions, say two people start in tech by building a website for reported the irst drop in quarterly
familiar with the companys inances. the Beastie Boys, he struck a delicate smartphone shipments, by 3 percent.
So Apple feels less urgency when Music balance between artist and engineer. You couldnt help but wonder how
Technology
Quoted
long the party could go, says Wharton A day later, the Senate
management professor David Hsu. Commerce Committee
sent Mark Zuckerberg
The industry says smartphone a letter asking for
sales could revive, given that people details on the selection
will eventually need to replace their It was absolutely bias. We of trending topics
by 2020 there will be 5 billion Internet print authentication since 2013, law
20% of Things devices in use, compared enforcement may be able to compel
with 4 billion smartphones. But most suspects to press their ingers to the
0% IoT devices will cost $1 or $2 and wont devices and unlock them.
Q1 2011 Q1 2016 need replacing for 5 to 10 years. So With minimal litigation on the
Technology
books in the U.S., police years, estimates researcher latest iscal years. The non-GAAP mea-
and prosecutors require IDC. As the pile of warrant sures raised the businesses collective
only a judges blessing on requests grows, the pres- earnings 23 percent, to $239 billion.
a warrant for a suspects sure will be on magis- In their latest quarterly earnings
ingerprints. So far trate judges to draw a reports, Amazon.com and Facebook
theyve used the power line between genuine stopped eliding their stock-based com-
sparingly. But as the seizures and ishing pensation, joining exceptions such as
number of ingerprint expeditions, says Netlix and Intel. We view it as a real
scanners in hip pockets Leslie Harris, a lec- expense, Facebook Chief Financial
grows, district attorneys turer at the University Oicer David Wehner said on his
across the country say the of California at April 27 earnings call. Unlike in previ-
technology is poised to Berkeleys School of ous reports, the CFO focused on GAAP
become a major engine of Information. They numbers and said
evidence-gathering. It is likely could be the last line of Equity Pays he would do the
to be just a matter of time till defense, says Harris, whos Slice of Profits same on future
this does become a primary gateway also president of the Harris Strategy calls. A day later,
to accessing phones, says Micheal Group, a think tank that advocates EBay 17% Amazon reported
OConnor, an Alameda County assistant for privacy rights. And they often get Alphabet 26% stock-based pay
district attorney in Oakland, Calif. calls in the dead of night that force Alibaba 38% for its diferent
If a person has enabled Apples them to make immediate decisions. Its Facebook 46% businesses for the
Touch ID, her ingerprint will unlock not an ideal situation. LinkedIn 75% irst time.
the phone for 48 hours after locking The ingerprint lock systems, as they Yahoo! 80% During the irst
Amazon 91%
before the device requires a PIN. stand, though, arent foolproof skeleton dot-com boom,
Twitter 247%
Systems on newish Samsung and LG keys for law enforcement. When the fast-growing tech
phones work similarly. Los Angeles phone is switched of and restarted, it startups argued
and Oakland are among the cities requires a pass code. And it wont take that the option grants they were
that have already granted or received long for criminals to learn that the little handing employees were too dif-
warrants for the use of a inger to scanner on the home button isnt their icult to reliably value for the pur-
44 unlock a phone. The next step may be friend. Kartikay Mehrotra poses of quarterly reports. Thats still
a lawsuit that determines whether a the default position in an era when
The bottom line Fingerprint locks, which will be
ingerprint is of-limits. the norm in two years, give law enforcement an most equity grants come in the form
Legal scholars say law enforce- end run around smartphone encryption. of restricted stock with a straightfor-
ment is likely to win that ight. Two ward vesting schedule. The result:
years ago, authorities contended Some serious money is factored out
that a locked iPhone 5S belonging to of the bottom-line reporting. The
David Baust, a paramedic in Virginia average public U.S. company has a
Beach, Va., might contain video evi- Earnings price-earnings ratio of 17meaning its
dence of him in bed strangling his stock price is 17 times greater than its
girlfriend, according to a court iling.
Amazon and Facebook estimated 2016 earnings per share
Bausts lawyers argued that unlock- Now Mind the GAAP or 18, when you count stock com-
ing the phone would violate his Fifth pensation, according to Sanford C.
Amendment right to avoid incrim- Bernstein. Facebooks p-es are 35 and
At a moment of strength, a switch
inating himself. A state judge ruled 50; Amazons are 63 and 122.
to less favorable accounting
that demanding Baust type in his pass So why make the change now? If
code would entail a mental process Theres no better time to change you can act from a position of strength,
leading to self-incrimination, but your behavior which Amazon and Facebook clearly
that asking for his ingerprint was are, theres no better time to change
more like drawing a blood sample For more than a decade, many of the your behavior, says Denny Fish, a
and therefore OK. largest technology companies have portfolio manager at investment irm
Although the Virginia decision isnt danced around the cost of paying Janus Capital Group. Facebook just
binding on other judges, its only a workers, releasing proit numbers that reported one of its best quarters, and
matter of time before a higher court dont account for the heaps of stock Amazon nearly doubled analysts
weighs in and sets a precedent, says they dole out. Instead of conforming to already bullish proit estimates. They
Rahul Gupta, a senior deputy district the U.S. standards known as Generally look more responsible, and it makes
attorney in Orange County, Calif. He, Accepted Accounting Principles them accountable for how they issue
too, is betting on police and prosecu- (GAAP), which include equity-based pay stock for compensation, says Fish.
tors. Its just the same old evidence, costs, roughly four in ive of the 70 tech While investors rarely punish the
blood or a mouth swab, being used in a companies in the S&P 500 index use industry for its creative account-
diferent way, he says. handpicked proit measures that make ing, Facebooks and Amazons shifts
Fingerprint-scanning phones will their earnings look better, according to also follow mounting criticism about
become the majority within about two data compiled by Bloomberg for their overuse of non-GAAP numbers. In
Technology
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Markets/
Movin on up to Banks may not be able The 401(k) income
deluxe senior living in to bank on arbitration gap 52
Manhattan 48 49
Expectation 47
Reality
GETTY IMAGES (2)
With bond yields low and stock valuations high, future returns may be smaller than you think
The markets arent going to bail you out if you havent saved enough
Markets/Personal Finance
How low can you go? Paltry Payout may create streaks of high returns as
Thats the question for investors Market value of investors keep plowing money into
as the era of near-zero short-term global government $8t hot corners of the marketbut when-
bonds by yield
interest rates stretches into its eighth ever that happens, bubbles tend to
year, throwing into doubt long-held $6t inlate and burst.
assumptions about the returns they Economist and former Treasury
can expect from their savings. In the $4t Secretary Lawrence Summers has
U.S., 10-year Treasuriesa mainstay argued that the world may be in a
for those looking for a safe yieldpay $2t prolonged period of secular stagna-
just 1.75 percent a year. Elsewhere in tion, characterized by slow growth,
the developed world, about $7.9 tril- $0 low interest rates, and periodic asset
lion in government bonds will efec- More 1% to 2% Zero Less than bubbles and crashes (page 12). Even if
than 2% to 1% zero
tively pay a negative yield if theyre thats too sweeping a claim, it seems
held to maturity. that the Federal Reserve and its coun-
Stocks are much less predictable, their nest egg, then raise the dollar terparts around the world dont
but theres reason to lower expecta- amount each year with inlation. expect a quick return to normal.
tion for equity returns as well. Perhaps Today, a 3.5 percent initial withdrawal There clearly isnt any great appe-
in part because the returns available might be more realistic, says planner tite among the central banking com-
from bonds are so low, investors have Harold Evensky of Evensky & Katz/ munity to raise rates materially,
pushed up the valuations of equities Foldes Financial. For a retiree with says Adrian Grey, head of active man-
in the years since the crash in 2008. $2 million, switching from 4 percent to agement at London-based Insight
Heres one simple measure: Stocks 3.5 percent means a $10,000 reduction Investment. People need to get their
on the S&P 500 trade at an average in yearly income. Evensky says some heads around that this could be here
price of 19 times earnings, up from retirees will likely instead respond by for a while. Margaret Collins and
about 10 times in early 2009 when the allocating more of their portfolios to Rich Miller
current bull market began. stocks to reach for higher returns.
The bottom line Todays skimpy bond yields
Right now, things look pretty bleak At the other end of the spectrum, for suggest that it makes sense to prepare for lower
for the next 10 years, says David people turning 30, delated returns will long-term returns on savings.
48 Blanchett, whos head of retirement mean theyll have to work seven years
research at Morningstar. This may longer or save almost twice as much to
come as an especially rude shock to end up with the same nest egg as those
investors in the U.S., where stocks have born roughly a generation ago, accord-
earned an annualized average of about ing to an April report by McKinsey. The Retirement
10 percent over the long term. The prior generation enjoyed what the con-
U.S. has had a higher return for a bal- sulting irm calls a golden era of high
Building Assisted
anced portfolio for the last 115 years returns based on declining inlation Living for the 1 Percent
than almost any other country in the and interest rates, swelling corporate
world, he says. Weve had it really proits, and an expanding price-
A place for aging Manhattanites
good for a long time. earnings ratio for stocks. Now inlation
if they can pay $20,000 a month
Assuming a lower baseline for invest- and rates can hardly get lower, and the
ment returns has consequences for a other factors seem unlikely to recur. It became a passion for me to
range of inancial planning decisions, Blanchett says some of the best strat- find a site on this island
including how much to save, how egies to boost returns from here on
much to withdraw in retirement, and might be behavioral. Make the most Its no accident
where to invest. of tax-advantaged savings programs that Manhattans
Bill McNabb, chief executive oicer such as 401(k)s and individual retire- newest senior-
at mutual fund giant Vanguard, says ment accounts and pay close attention living facility
bondsincluding higher-yielding cor- to the fees you pay on investments. will rise just blocks away
porate debtare likely to average Minimizing debt could help, too. What from the gilded co-ops of
2 percent to 3 percent over the coming you save on interest by paying of a Park Avenue. The residents
decade. A combined global and U.S. loan may beat the returns youll get of those buildings might call
stock portfolio might earn about from stocks and bonds, says Blanchett. the place home someday.
7 percent. Over the next 10 years, the Not everyone in the market is ready Welltower, a real estate investment
markets arent going to bail you out if to accept the idea of low returns. trust that invests in senior housing, is
you havent saved enough, he says. The fact that people are unrealistic pushing into New York City. Last month
DATA: COMPILED BY BLOOMBERG
If so, lower returns will have the is actually creating risky behavior in it joined with luxury developer Hines to
most immediate impact on people who the way that they are putting money buy a site at 56th Street and Lexington
are in or near retirement. Financial to work, said David Hunt, head of Avenue, and its planning a tower to
planners often cite an old rule of Prudential Financials asset manage- accommodate wealthy Manhattanites.
thumb that retirees can set annual ment unit, in a Bloomberg Television It will include both assisted living and
spending at 4 percent of the value of interview in May. That risky behavior memory-care services, which are in
You take someone
whos lived at 88th
and Park their
Markets/Personal Finance
entire life, and you
all of a sudden say,
short supply in the Im moving you to listed at more than $70 million. Consumer advocates say class
New Canaan,
borough. Conn.You will kill
The joint venture spent about actions are an essential tool to help
You take someone that person. six months looking for a site to the public win relief and to hold
whos lived at 88th and Thomas DeRosa buy in Manhattan, a search that companies accountable for bad
Park their entire life, and included a failed bid for a lot on behavior. Industry groups argue that
you all of a sudden say, the Upper West Side. Their main curbing arbitration clauses will result
Im moving you to New requirement was a good loca- in more frivolous lawsuits and higher
Canaan, Conn., because thats tion. It became a passion for me to legal costs that banks will ultimately
the closest assisted-living facility I can ind a site on this islandand not on pass on to consumers.
get you intothat is unacceptable, says 93rd and First, says DeRosa, a native Theres only one winner coming
Thomas DeRosa, chief executive oicer New Yorker, referring to a less expen- out of this rule: the plaintifs class
of Welltower. You will kill that person. sive corner of the Upper East Side. action bar, says Alan Kaplinsky, head
A slowdown in the citys luxury con- Oshrat Carmiel of the consumer inance practice at
dominium marketwhich has dom- Ballard Spahr, whos represented
The bottom line An owner of assisted-living
inated building and pushed up land facilities looks to get in on New York Citys luxury banks and played a role in the rise of
values in recent yearsgave Toledo- housing boom. using arbitration clauses in contracts.
based Welltower an opening to enter About half of outstanding credit
Manhattan. The company and Hines card loans were subject to arbitration
together paid $115 million for the site, clauses in 2013, the CFPB found in a
where they plan to erect a 15-story study released last year. Few consum-
building. The concept theyre plan- Consumer Finance ers bring, or even consider, individual
ning is a little bit unproven, says actions against their inancial service
John Kim, an analyst covering real
Suing Your Bank Could provider in court or in arbitration, the
estate investment trusts with BMO Soon Be Easier study said. In arbitration, individuals
Capital Markets in New York. must square of on their own against
Like anything built in Manhattan the company they believe wronged
A proposed rule will bring back
in an era of record land prices and them, instead of sharing resources
the class-action lawyers
soaring construction costs, the price and building a case with others in a
of living at the eventual tower will Arbitration is just not doing class action. 49
be steep. Monthly rent at the facility, anything for consumers The whole point of these arbi-
which will cover the costs of a room, tration clauses
caregiving, and food, is likely to top Have you ever been charged a fee on in consumer
$20,000, DeRosa says. Health insur-
ance doesnt cover it, which means
residents will be paying out of pocket.
your bank account that you thought
was unfair? Or not gotten the cash
rebate you expected on a credit card
53% inance is to kill
the claims, says
Deepak Gupta, a
High as that price is, DeRosa says, purchase? Or seen the rate on a short- lawyer at Gupta
it is competitive with the combined term loan shoot up for reasons you Wessler who
expense of hiring full-time caregivers didnt understand? Share of outstanding previously worked
at home and the costs of maintaining a You might have a case to make, you credit card loans at the CFPB.
residence in Manhattan. might notbut either way, it may be subject to arbitration The proof is
clauses
There are other assisted-living hard to get that case heard in court. in the pudding.
facilities in Manhattan, but building Customer agreements for credit Arbitration is just
a ground-up project now, at a time cards, bank accounts, payday loans, not doing anything for consumers.
when many New York builders are and other inancial products often The regulators proposal would
struggling to make their developments include terms that require disputes to cover new agreements for products
proitable, presents some risk, says go through private arbitration. Thats such as credit cards, auto loans, and
BMO Capitals Kim: Theres going to about to change if a U.S. regulator credit reports. There will be a public
be a little bit of a learning curve on has its way. comment period for 90 days before
the demand side to see if residents are The Consumer Financial Protection the regulator issues a inal rule.
willing to pay those kinds of prices. Bureau proposed a rule on May 5 The soonest it will likely take efect
Welltower owns about 1,500 senior- that would restore the right for is mid-2017, since companies will have
housing and medical-oice properties people to join together in class- 210 days to comply with the require-
across the U.S., the U.K., and Canada. action lawsuits when they feel theyve ments. Companies will still be able
It started looking for a foothold in been wronged by a inancial insti- to include arbitration clauses in
Manhattan as part of a strategy of tution. Many banks and inancial contracts, but they must state that
building in markets that are tough companies avoid accountability by they cant be used to stop individual
for competitors to break into. The putting arbitration clauses in their consumers from joining a class-action
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company joined with Houston-based contracts that block groups of their case. Lawsuits challenging the rule
Hines, which also is building a luxury customers from suing them, the are expected.
condo tower next to the Museum agencys director, Richard Cordray, The arbitration rule is one of the
of Modern Art that has a penthouse said in a statement. biggest initiatives the CFPB has
Markets/Personal Finance
undertaken since the bureau was increasingly delaying having children, is a lower court judge. The couple
created in 2010 as part of the Dodd- who gets the pet can sometimes be eventually settled their dispute over
Frank Act. Its one of several ways the one of the most emotional questions Joey out of court.
Obama administration is seeking to raised by a divorce. Yet courts have Judges, including Cooper, have
make it easier to sue inancial institu- little to say on the issue. so far rejected the idea of ordering
tions. The U.S. Department of Labor Traditionally, the law sees pets as joint custody arrangements for pets.
released new standards last month property, no diferent from a couch Couples can hire lawyers to negotiate
aiming to protect savers from conlicted or a houseplant. The average dog or a private contract, separate from their
investment advice, which includes the cat has a market value of zeroand divorce, to settle questions of custody.
right to bring class actions. can cost thousands of dollars to feed, In practice, Reeves warns, theres no
While the CFPBs proposal would walk, and keep healthyso it would guarantee any court will take these
afect only inancial agreements, it seem to have little legal priority. But agreements seriously. These deals
could have a broader impact on all emotional attachment can turn a can also be expensive to negotiate
sorts of contracts that feature arbi- beloved pet into a valuable bargaining and enforce. Although people are
tration provisions, such as employ- chip in divorce negotiations. very emotionally attached to animals,
ment agreements, according to Mike Natalie Reeves, a New York-based in the vast majority of cases they
Calhoun, president of the Center for divorce lawyer at the ToniAnn Grande cant aford to ight over them, says
Responsible Lending. This will have irm and an expert on animal law, Joslin Davis, a family lawyer based
a very signiicant impact, he says. says she has seen people use their in Winston-Salem, N.C., who is pres-
This could set a precedent for leg- animals in this way. In bitter divorces, ident of the American Academy of
islation or other actions that would she says, you take whatever another Matrimonial Lawyers.
put these protections in place. person loves the most and try to use Debra Vey Voda-Hamilton, a
Elizabeth Dexheimer that against them. That might mean former divorce lawyer, now special-
demanding the cat, even if the animal izes in resolving pet disputes outside
The bottom line The nancial industry says
forcing disputes into arbitration keeps costs down. is more attached to your ex. court. Agreements reached through
The CFPB thinks lawsuits hold banks accountable. Judges have a lot of discretion in mediation can be very detailed.
how they divide property in a divorce. Owners might be required to use
Pet lovers can strengthen a claim by groomers or dog walkers to transfer
50 proving they used their own money pets between homes, ensuring exes
earned before the marriageto buy dont have to see or interact with each
Divorce the pet or pay for its veterinary bills, other. Voda-Hamilton tells her clients:
Reeves says. You hate your exI get thatbut your
Who Gets the Dog? Its Increasingly, some judges will con- pet doesnt.
An Expensive Question sider other factors when splitting Dog owners sometimes scale back
up pet-owning couples, such as the custody demands when they think
best interests of the pets or the fami- through the implications of owning
The law calls pets property, but
lies that love them. In a 2013 divorce, the pet while single. They want the
thats not how couples see them
a New York judge agreed to hold a dog, but they dont recognize the
You hate your exI get thatbut rare hearing on a couples ight over amount of time and care it takes, says
your pet doesnt a dog. Although Joey the miniature Voda-Hamilton.
dachshund is not a human being and Rudys divorced owners didnt
Rudy is a 9-year-old German short- cannot be treated as such, he is decid- go that far. When its time for the
haired pointer with a regal personality edly more than a piece of property, shorthaired pointer to switch homes,
and loving owners who are divorced. Judge Matthew Cooper wrote. The they just text or call each other. It
The humans in his life agreed to a ruling was one of the works, Trinchero says, because both
shared-custody arrangement. irst times a court had she and her ex-husband recognize
Every two weeks, Rudy travels ever explained reasons Rudy as their shared responsibil-
between their two homes in for considering pets as ity, even if its pretty much the only
western Massachusetts. more than property, connection they still have. Trinchero
It was an informal deal, making it inluential
m t
takes Rudy for long walks; her ex
worked out with no help even though t
takes the dog out pheasant hunting.
Its not your
from a divorce court. fault Judge Cooper Hes a member of our family, she
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Driven to do more.
Simon de Pury
The boom in the late 80s had been
fueled by Japanese collectors. In May
1990, world records were beaten for
Dr. Gachet by Van Gogh at Christies for
$82 million. Then in June, all Japanese
The renowned auctioneer and art expert describes the markets buyers had withdrawn from the market.
Its by 96, 97 that it really gathers
recent swings and his philosophy of what to bid on steam again. In 08, its the opposite. It
stopped in October 2008, but then in
March 2009, there
How much speculation is going on? In other was the Pierre
words, people buying pieces they love but would Berg auction,
Tell me about the art market today easily get rid of for the right ofer? which was the most
There are, of course, as many motivations for successful auction,
and where you see it headed. at the time, ever to
collecting as there are collectors. And some are
A lot of owners of top works have interested by the speculative aspect of it all. But take place.
decided to hold back. This season even the most serious collectors have never seen
there are far less really top-end works a single collector who would show you a work and
say, Listen, I bought this for $1 million and now
on the market. These last few years, its only worth $200,000. So even those who buy
literally from 2009 up to the end of out of passion for art as their prime motivation
last year, prices kept climbing. If you take contentment when they see that what theyve
spent money on has been a good investment.
did own something truly exceptional,
you were tempted to feel Maybe now
is the moment I should put it on the
market. So the volume in the auctions
is considerably lower than it was. But Whats happening at
the sales that have taken place so far Sothebys, which you left
have been very solid. in 1997?
A number of specialists who
have spent many years there
have recently left. There has
always been some mobility,
with people moving on,
54 ofering an opportunity for
the junior staf to move up
one or two notches. Whats
maybe unusual, in terms of
what has happened recently,
is the number of seasoned
specialists who did leave.
I think that some of these
Ive never seen a good specialists will go to other
houses. Some will become
collection made by someone art dealers.
d d
Bill Maris g w d
CEO / GV
Bloomberg
Conference
2016
Proudly sponsored by:
Fo
You can put that army
of consultants on
furlough 58
Mi On Vrooms virtual
car lot, theres no
pressure 59
57
commercially for almost 200 years, the Amplifys chief executive oicer. They went public in August of last year in a
movie theater and ballpark staple is want to know what theyre eating. $270 million IPO.
having a renaissance. Thats because SkinnyPop hit the market in 2010, the The stock offering came just days
Americans are noshing moreand creation of a pair of Chicago entrepre- before the onset of market turbu-
more often. They want food thats con- neurs whod previously sold gourmet lence thats dissuaded a number of
venient, simple, and healthy. Annual caramel- and cheese-flavored popcorn. consumer-products companies from
sales of ready-to-eat popcornmeaning Annual sales climbed to $44 million going public. Shares of Amplify hit a
already poppedhave exploded since within three years, drawing the atten- low of $9.43 on Jan. 11; theyve bounced
2011, almost doubling to $1.1 billion. The tion of TA Associates, which paid back more than 25 percent but are still
growth has been powered by Amplify $320 million for a majority stake in the below their IPO price of $18.
n/Mid-Market
les of the companys flagship piece of the U.S. salty-snack market, Ennis says he isnt overly concerned
po t, which account for almost dwarfed by sales of potato and torti- about the growing number of compet-
all f i s revenue, have surged lla chips and nuts, according to data itors. Angies Boom Chicka Pop and
0 percent during the from Euromonitor. Overall, popcorn Popcorn Indiana, two rivals battling
st t o years to finish sales were about $2.9 billion Consumers love for clean-popcorn consumers,
$176.9 million, last year, compared with a the simplicity of had a combined $107.7 million
according to data from combined $15.3 billion for tor- popcorn. They in sales last year, while
want to know what
market researcher tilla and potato chips. But theyre eating. Amplifys were $183.9 million.
IRI. Euromonitor popcorns been the fastest- CEO Tom Ennis, The Texas company also has a
Inte
e l ranks SkinnyPop fourth growing salty snack each of Amplify Snack big head start on late-arriving
Brands
in the ve ll popcorn marketwhich the past three years, leading food giants who might try to
includes Orville Redenbachers from more companies to focus on jump into the market. The
Conagra Foods and Pop Secret from the category. Conagra, which land grab is over, Ennis says.
Diamond Foodsand No. 2 in the makes two of the largest microwave Amplify is expanding beyond
faster-growing ready-to-eat segment, brands, joined forces with reality-TV popcorn. On May 2, it announced
where it trails only Smartfood, the long- star Bethenny Frankel in 2014 on a an agreement to buy Boundless
time leader produced by PepsiCos SkinnyGirl brand, in a direct pitch at Nutrition, an Austin company that
Frito-Lay, the worlds largest snack weight-conscious female consumers. makes snack bars and cookies and
company. SkinnyPop and Smartfood Annies Homegrown, an organic label had sales of about $7 million last year.
are profiting as consumers move away owned by General Mills thats best Amplify also has its eyes on a bigger
from microwave popcorn, which now known for its macaroni and cheese, piece of the salty-snack market, and
trails the ready-to-eat variety. released a popcorn earlier this year; its once again gunning for Frito-
After acquiring SkinnyPop, Amplify and Inventure Foods, the makers Lay. The company started distribut-
ramped up marketing and increased of Boulder Canyon potato chips, ing its Paqui (rhymes with hockey)
distribution with retailers looking recently debuted Real Thin Pop. Steve tortilla chips across the U.S. this year.
to boost their healthy salty-snack Sklar, who runs the snack division at The gluten-free, non-GMO chips are
offerings. Ennis also credits the Inventure, says his companys popcorn flavored with organic cheddar cheese.
brands success to new cooking tech- has less fat than SkinnyPop. Real Thin Ennis calls it a better-for-you Dorito.
58 niques and packaging innovations Pop varieties are cooked in olive, Craig Giammona
that help precooked popcorn stay coconut, and avocado oil. Anybody
The bottom line Sales of Amplify Snack Brands
fresh on store shelves. It doesnt hurt can do a different flavor, he says, but SkinnyPop have grown 300 percent in the past two
that the name SkinnyPop implies its not everybody has the technology to years, propelling it to No. 4 in the popcorn market.
a diet food without explicitly saying use different oils.
so. Popcorn got cleaned up, says One reason competition is heating
Kara Nielsen, a culinary-trend analyst up is that SkinnyPop has demonstrated
for Sterling-Rice Group, a branding that consumers will pay a premium for
company. Consumers were craving SkinnyPop becomes
clean popcorn. At Services
an alternative to giant tubes of fluo- Walmart.com, a
rescent popcorn flavored with fake
the No. 2 ready-
to-eat brand, after 12-pack of 4.4-oz.
When One Consultant
butter and sweet, tooth-rotting
Smartfood
bags of SkinnyPop Is Better Than a Dozen
caramel corn. It went from being an costs about $50, while a carton with
indulgent treat to being an everyday twenty-five 1-oz. boxes of Cracker Jack,
Business Talent Groups experts
snack that isnt bad for you, she says. Conagras long-popular caramel corn,
dont carry expensive overhead
Popcorns still a relatively small can be had for $15.88.
I didnt need a big team of in the
corner working by itself
No Nukes
U.S. popcorn sales $1.2b When Mark Greenstein, executive
vice president for strategic initiatives
Microwave Ready-to-eat
93%
Increase in ready-
at Heartland Dental, sought consult-
ing help earlier this year, he didnt
call his former employer McKinsey.
to-eat popcorn sales
since 2010 He turned instead to Business
$0.6b T e roup, which matches com-
nies iith experienced but less
34%
Rise in average unit
costl
I need
ependent consultants.
ded one top person who
could work side by side
price of ready-to
popcorn since 20100 ith my managers,
0 Greenstein, whose
2010 2015 DATA: IR
RI pany, based in Eingham,
Focus On/Mid-Market
Ill., provides administrative services understood the administrative requiring a single consultant who can
including payroll, accounting, and outsourcing his company handles. help him and his managers map a
IT to 750 dental practices, not a team He also sought someone whod work strategy. Six years ago, soon after he
of senior and junior consultants closely with his ive-person staf and arrived at Broadridge, based in Lake
that could cost several hundred help them broaden their problem- Success, N.Y., Gokey hired a consul-
thousand dollars a week. solving skills. Im a huge fan of tant through BTG to help him reshape
Midsize companies such as McKinsey and the work they do, but I marketing. He liked the consultants
Heartland, which has about $1.1 billion didnt need a big team of in the corner work so much, after six months he
in annual revenue, often require con- working by itself or the overhead costs hired her as his full-time chief market-
sulting helpon everything from that go with hiring them, Greenstein ing oicer. BTGs extensive network is
digital marketing to expanding over- says. With BTGs model, when we cost-efective, Gokey says, and some-
seasbut they dont want the teams need an extra day or two to think things times we can even recruit from it.
that big consulting irms often assign through or to clean up data, we can Carol Hymowitz
or the hefty expense of hiring them. aford to take that time.
The bottom line With 5,000 consultants on tap,
Many are turning to companies like Los The consultant he hired through Business Talent Group has seen revenue grow
Angeles-based BTG, which allow them BTG, Christian Frank, was, like 50 percent annually for the past five years.
to choose from a range of independent Greenstein, a former McKinsey
consultants, typically for about one- employee, and had experience in
third to one-half what a Big Three con- health-care and administrative out-
sulting irm would charge. sourcing. Hed also been an executive
Founded nine years ago, BTG con- at IBM and at ADP, a provider of admin- E-Commerce
tracts 5,000 consultants and profes- istrative services to global companies,
sionals around the world. Most have and hed run his own startup.
Elbowing Out the
MBAs and years of experience working Heartland is already acting on Franks Used-Car Salesman
or consulting in various industries. recommendations. With smaller
When a client needs clients, youre much
On Vrooms website, theres no
help, BTG assesses the closer to the ultimate
haggling and shipping is free
scope of the project and decision-makers than
ofers a choice of a few at large corporations, We have to make sure the car 59
potential consultants the consultant says. is amazing
with suitable back- Sometimes every-
Miller
grounds. Most proj- one agrees with an idea About a year ago, violent storms hit the
ects require a single youve helped formu- Houston area. When the loodwaters
person or a small team. late, and then, instead receded, Vroom, an online seller of
And because theyre of being sent through used cars, discovered it had lost more
self-employed, BTGs seven diferent man- than 100 vehicles, equal to about
consultants dont come agement layers for $3 million in sales. It was a reminder
with the overhead costs approval, its put into that the two-year-old Web startup faces
of those employed by a action the next week. some of the same challenges as a brick-
large company. Clients Frank is now starting and-mortar retailer.
hire only the person or a second consulting Vroom is one of several companies
people they need for project at the company seeking to consolidate the frag-
the time they want, and aimed at lowering costs mented used-car market. But unlike
we provide access to talent that can and improving quality in operations. rivals Beepi, Shift Technologies,
be hard for midsize companies to get, Other midsize companies use both and Carvana, which mostly connect
says BTGs co-founder and chief execu- traditional consulting irms and BTG. buyers and sellers via online market-
tive oicer, Jody Greenstone Miller. At Broadridge Financial Solutions, places, New York-based Vroom buys all
More than one-quarter of BTGs which has $3 billion in annual revenue of its cars, then refurbishes and guar-
clients are businesses with revenue of and provides investor communica- antees themmuch the way a tradi-
$1 billion or lessand that shares been tions and technology to inancial insti- tional dealer does.
steadily growing. We market mostly tutions, Chief Operating Oicer Tim Allon Bloch, the former venture
to big companies, but midsize irms Gokey hired consultants from big com- capitalist who runs Vroom, says many
are inding us, either through word panies including Boston Consulting Americans who are happy snapping
of mouth or through the investment Group to carry out due diligence up a $10 shirt online remain leery
community, Miller says. BTG gets a on acquisitions, plot strategy, and about going there to buy a car, typi-
CHRIS GOODNEY/BLOOMBERG
cut of each project fee; revenue has handle projects that require a lot of cally the second-biggest purchase after
grown 50 percent annually for the past data analysis. They could get a lot a home. If a consumer spends tens
ive years and is on track to surpass done quickly, didnt need his supervi- of thousands of dollars on a car that
$40 million in 2016, she says. sion, and also had access to extensive theyll use for many hours every week
Heartlands Greenstein told BTG research from their irms, he says. and may own for years, we have to
he needed a senior consultant who Gokey taps BTG for projects make sure the car is amazing both
Focus On/Mid-Market
COURTESY MIKE WELCH/TEXAS DIRECT AUTO/VROOM; DATA: CRAIN COMMUNICATIONS AUTOMOTIVE NEWS, AUTODATA
software to keep tabs on its inventory
of as many as 4,000 vehicles. Bloch says
the program helps the companys facil- loaded onto which truck to be delivered Kevin Tynan, the less Vroom makes and
ities in Dallas and Houston, where vehi- where. The company farms out half the the less cash it has to buy more inven-
cles are inspected and prepped for sale, deliveries, but in the next 12 months, tory or build out operations. Bloch
work as smoothly Bloch plans to bring the whole opera- declined to specify a timeline to proit-
Sales of certified as a factory assem- tion in-house, so Vroom can move to ability, saying the company is focused
pre-owned vehicles bly line. Buyers 24-hour delivery. Of course, that means on investing in growth.
700k get a 90-day war- buying trucks, hiring drivers, and In April, another lood hit Houston.
ranty, seven days to adding facilities, including one opening At 6 a.m. on a Monday morning, about
return the car for this year in Indianapolis. two dozen Vroom employees braved
550k a full refund, and Because its ixed costs are higher the rains to move vehicles to higher
one year of road- than most e-tailers and its prices are ground. To identify the most high-risk
side assistance. cheaper than those ofered by tradi- cars and their locations, the workers
400k Bloch says his tional dealers, Vroom will need to move consulted newly tweaked software.
1Q 11 1Q 16 prices are 8 percent a lot of metal very eiciently to make This time, Vroom lost only about a
lower on average money. The company says it sold tens of dozen vehicles. Jing Cao
than those of other dealers. After thousands of cars last year, generating
The bottom line Unlike rival marketplaces for used
clicking Buy, a customer typically about $900 million in revenue. Getting cars, Vroom buys and inspects all of the vehicles it
receives her car in less than a week. the cars out the door quickly is key, lists for sale on its website.
Vrooms two facilities process a few because their value depreciates every
hundred cars a day, using algorithms day they sit unsold. The longer it takes, Edited by Cristina Lindblad
to igure out which vehicles should be says Bloomberg Intelligence analyst Bloomberg.com
When it comes to
your wealth, the
questions you ask
could be your most
valuable asset.
Ask questions.
Be engaged.
Own your
tomorrow.
In life, you question everything. The same should be true when it comes to managing your
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professional stand by their word? Do you know how much youre paying in fees? And how those
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again at Schwab. We think youll like what we have to say. Talk to us or one of the thousands of
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Brokerage Products: Not FDIC Insured No Bank Guarantee May Lose Value
Its playing
for the mere
millionaires
being humiliated
by billionaires
in paradise
By
Robert Kolker
Once upon a time, thousands of years
ago, a surging mass of magma beneath
the Pacific Ocean burst through the
earths crust and began burping out a
stream of lava, irst underwater, then
above, to form land. As the tectonic plate
shifted, the eruption created a string of
four islandsall of which are pretty nice,
but the largest, known today as Hawaiis
Big Island, is as close to paradise as any
human might deserve. On the beaches,
the temperature hardly ever roams above
the mid-80sF or below 70. Its the tropics,
yet its seldom muggy. And rain, when it
comes, is like an afterthoughtthe gentlest
of reminders of how achingly wonderful
the island is the rest of the time. This way to the
But even in paradise, lobby at the Four
some spots are better
$33.7b Seasons. Below,
than others. The islands northwest shore ground zero for the
is a gold coast made remote and exclu- Rockpoint Group, bowed out in 2014,
$3b loved the familial recent struggles
sive by a border of long, lat ields of vol- Rob Walton of the Walmart Stores aloha spirit everyone talked about. Now,
canic rock. Laurance Rockefeller opened family bought a minority stake. The he was being told no.
the Mauna Kea Beach Hotel there in 1965. most prominent homeowners include As his wife started to cast about for a
Then came the Hapuna, the Mauna Lani, Citadel founder Ken Griin, Starbucks patch of grass on which to set up camp,
the Orchid, and the Waikoloa. In his inal Chief Executive Oicer Howard Schultz, the executives mind looded. This was
years, Steve Jobs often hid out in Kona brokerage pioneer Charles Schwab, Hualalai, not South Beach. This wasnt
Village, a rustic, low-i, Bali Hai-style KKRs George Roberts, Oaktree Capital supposed to happen in paradise.
hideaway best reached by
private plane. Nearby is
$5.6b Management co-founder Bruce Karsh, He pulled out his phone, took a
G oDaddy founder B ob Parsons, picture, and texted it to the manage-
Kukio, a quiet homeowners commu- Columbia Sportswear CEO Tim Boyle, ment. They apologized right away. They
nity where KKRs Paul Hazen, Sutter Hill and Warren Bufetts sister Bertie. (Each were all too familiar with the problem.
64 Ventures David Anderson, and Silver of their places was purchased for or is
Lake Partners David Roux became neigh- currently appraised at $17 million to Les Firestein is a Hollywood
bors. And last to be built, nestled between $23 million.) But no one who frequents $5.9b screenwriter who had brought
Kukio and Kona Village, came the
place that in many ways would out-
$4.6b Hualalai upstages the loca- his family to Hualalai as hotel
tion. The shore has a shallow guests for years. Its extravagant, but they
class them all. shelf stretching out almost a half-mile, deliver, he says. You know youre going
Hualalai, developed in 1996 by Japans making a friendly swim with a team of to have a perfect time. Last summer a
Kajima Corp., is a pristine, manicured dolphins an almost daily possibility. friend who owned a home there ofered
865 acres on which are tucked a $1,000- And while some resorts to the north are him free use of his place for a week.
a-night (for starters) Four Seasons hotel caught in a wind tunnel between two vol- Firestein said yes. Then he quickly learned
and a residential community of more canoes, Hualalai is in a calmer pocket. Its that if he wanted to do anything at the
than 300 homes and condominiums. like the clouds part for the place. resort beyond hanging out at his friends
The homeowners are served by their It was here, in the middle of all that, house, he had to pay daily unaccompa-
own private Hualalai Resort Club, and that one sunny day about ive years ago a nied guest fees$150 for adults and $75
can also make use of the hotels phenom- senior executive at a company you would each for his two children. The fee gave
enal amenities. All in all, Hualalai has deinitely recognize wandered with his Firestein pause, but only briely. Right
the scale to sustain two championship- wife over to the Palm Grove Tranquility of the top, were paying $450 a day, he
caliber golf courses, seven bustling res- Poolthe one with a bar in the middle says. But then again, youre like, Oh, its
taurants, ive main swimming pools, and you can paddle up toand saw that all the Four Seasons. Well suck it up.
a snorkeling-friendly lagoon frequented the chaises longues were occupied on Firestein then learned that even after
by a spotted eagle ray and 4,000 other the pool deck. Then he walked a few paying the fee, his family wasnt entitled
Net worth fish. The spa has an feet to the beach and saw that the to the same access as hotel guests. It
apothecary with com- chairs there were taken, too. This man was like there were two systems of privi-
$17.6b poundable herbal rem- had been coming to Hualalai for years, lege operating at the same time, he says.
edies and supplements made on-site. irst renting homes, then buying a four- He wasnt permitted to reserve a table at
Along the links, golfers stop at comfort bedroom house. He had done every- any of the restaurants between 5:30 p.m.
stations stocked with complimentary thing possible to be in a situation where and 8 p.m. He had to show a guest ID
candy bars and bourbon. Poolside atten- the answer to every question would be card everywherelike, Show me your
dants ofer chilled towels, sunglass clean- yes. He had plunked down a $200,000 papers, he says, still annoyed.
ing, and Evian spritz service. initiation fee and $40,000 a year in It was poolside that he particularly felt
Michael Dell liked Hualalai so much dues to join the Hualalai Resort Club. the caste system at work. Youd go to a
that in 2006 he bought the whole His three children had practically grown pool and order what you want, he says.
thinghotel, resort, everything except up at Hualalai, made friends there, and And then, when you make the mistake
the private homes. When his partner, came back whenever they could. They of sitting in the wrong seat, a Hualalai
brownshirt basically comes over and says, The word no was getting an awful pay for anything else, like rent, says
You cant sit there. And there was liter- lot of use. And it was said to people Taber Anderson, a longtime homeowner.
ally no one else near the pool because it who werent accustomed to hearing it. With a surcharge like that, why would
was kind of drizzling. It was just bizarre. People who have invested millions of anyone rent a place at all?
Firestein writes dialogue for a living. dollars being homeownersbasically The goal, the executives said, was
Standing by the empty chaises longues, our needs are not as important as the to protect what they called Hualalais
PREVIOUS SPREAD: PHOTO ILLUSTRATION BY 731; SOURCE: SUSAN SEUBERT (1) GETTY IMAGES (2); THIS PAGE: COURTESY CHRISTOPHER ZYDA (2); ALL OTHER IMAGES IN THIS
he didnt hold back. I said to them, You hotel guests, says Mike Greenfeld, experience of exclusivity, according
know, this is weirdly like Jim Crow. Youre owner of a Hollywood postproduction to those who attended. No one in the
telling us we can eat here and not here, company and a Hualalai homeowner for room disputed that exclusivity deserved
and theres no one else around? almost a decade. In October he tried to to be protected. But no one in manage-
He didnt stay the full week. Another reserve spots for some friends at a luau ment seemed to
family the Firesteins had rendez- in December, a peak period. (Frankly, if care that some
voused with therevisitors, he notes youve been to one, youve been to them homeowners,
pointedly, from South Africaalso left all, he says, but they wanted to go.) those who rent
I dont want
early. It was the earliest recommended time their places for
to reserve, but he was told the luau was several months
to exaggerate, full. That was bull----, Greenfeld says. out of the year,
Firestein says, They were just holding space for hotel could lose tens
but it really is guests. He called and complained, the or even hundreds
hotel relented, and when his group got to of thousands of
an apartheid the luau, there was plenty of room. It was dollars in annual
experience. clear what had happened: The friends rental income
He didnt know it at the time, but he werent immediate family, so they were or that every-
was encountering a new policy enacted in a lower caste. ones resale values
by Hualalai Resorts, Dells management Tension over the policy boiled over might plummet
company on the ground. It has three in August, when three executives from once prospec-
prongs: First is the complex schedule of Hualalai Resorts convened a special tive buyers learn
steep resort access fees based on the time meeting of the Hualalai Homeowners about the extra
of year and the relationship of the guest Association to announce the resort was charge for anyone who rents. Days after
ARTICLE: DON RIDDLE/COURTESY THE FOUR SEASONS
to the homeowner (sons and daughters increasing the peak-period unaccompa- the meeting, Sandra Holstead, a home-
are OK; nieces and nephews, friends, nied guest fee to $250 and expanding the owner since 2004, told a Hualalai exec-
and renters have to pay). Next theres periods to several months of the year. utive she might be able to ind at least a
a status hierarchy for making dinner The steep fee, they said, was meant to few people willing to pay the $250 fee. 65
reservations at any of the restaurants. make it harder for people to rent out Maybe the fees would have to be higher
Finally theres the rule governing the their homessomething they argued was then, she says the executive replied.
use of the chaises longues by the pools, happening more and more frequently This could end in only one place:
which the Firesteins encountered at its and clogging up the hotels amenities. court. In October, Christopher Zyda,
most cognitively dissonant moment, A family of four is staring down the gun a Hualalai homeowner, iled a lawsuit,
on a deserted pool deck in the rain. barrel of $1,000 a day before you ever which he hopes to make a class-action
suit, against the Hualalai
owners, including Dells family
oice, MSD Capital, and the
Four Seasons. He and a group
of about 75 Hualalai homeown-
ers who openly support the
suit say theyve been bait-and-
switchedthey were promised
they could use their homes
and the hotels amenities freely
and without any guest fees,
then the rules changed.
The resort has essentially
responded that the homeown-
ers might want to check the
ine print of their homeowner
agreements. Management
can raise guest fees. It can
set up a metaphorical velvet
rope, cutting off access. It
can alienate the homeowners
who use their places for cash
low. And if it means certain
homeowners have to sell their
places to wealthier buyers
who arent put off by
those fees, so be it.
had a problem. How could they
ight an ownership agreement
theyd all signed that in several
places explicitly allows the resort
to charge whatever guest fees it
wants? The answer came from
their attorney, Terrance Revere,
who crafted a suit thats an
unfair competition case rather
than a contract case. By setting
up such steep resort access
fees for guests and renters, he
argued, Hualalai was essen-
tially trying to edge out compe-
tition for renters. For proof, he
said, look no further than when,
in 2014, Dells group made the
The Beach Tree, one
Four Seasons the manager not
of seven restaurants
only of the hotel but of the entire
at the resort
resortthe equivalent of placing
the fox in direct supervision of
the henhouse. Who benefits
when the Four Seasons-managed
resort raises renters fees? The
Four Seasons-managed hotel, of
This may sound like a battle of the exhaustively detailed table designating
course. If too many warm bodies at the
1 percent vs. the .001 percent over a diferent types of guests (club members,
resort are a problem there, Revere says,
bunch of beach chairs, says Zyda, who immediate family, extended family,
why arent they imposing the same fees
decries the resorts Gestapo escorted guests, accompanied guests,
on hotel guests?
tactics. But there are very unaccompanied guests) and different
real contract issues at hand. Ive heard times of year (peak, peak of peak). In court papers, and to me, the home-
homeowners say the agenda is to drive Its like a complicated, ever-changing owners who support the lawsuit accuse
all the homeowners out. video game, he says. I cant keep up with the ownership of a hidden agendaalmost
66 the rule changes and what Im allowed a conspiracy. They wonder if the fallof
Im a rule-follower type of person, and not allowed to do. None of this crazi- from the 2008 crash, the need for emer-
Zyda says, shouting over the buzz of his ness existed when I purchased in 2000. gency repairs after a 2011 tsunami, and an
groundskeepers weed whacker. Were The dispute is, naturally, about money. ill-fated investment that Dell made next
sitting in the backyard of his ive-bedroom But its about so much else, too. Its about door in Kona Village (still not reopened
spread at Hualalai, sipping water and power, or the loss of it. Its about feeling after the tsunami all but lattened it) kept
looking out on the ninth green of the jilted. Many of the homeowners sup- him from expanding Hualalais amenities
resorts Jack Nicklaus ported the resort from the beginning, fast enough to keep pace with its growing
golf course. I dont try putting down roots on what had been popularity. They have no access to the
to make trouble. lava fields. Now that resorts inances.
A 54-year-old finan- the hotel guests matter But the big tell,
cial adviser, Zyda discov- more, the homeowners they believe,
ered Hualalai 16 years ago are forced to watch as was that in 2013,
while on vacation from their ex parades new Bloomberg
his former job as treasurer of Amazon. companions in front reported that
com. He loved it so much that he used of them. D e l l s g r o u p
some of his stock options to buy a devel- More than anything, restructured
opment lot. Like others who support his perhaps, its about a $176 million
lawsuit, he remembers being told by his humiliation. These are loan. Apparently
real estate agent that one of the great wealthy people unac- seeking more
things about buying at Hualalai was the customed to being put cash, the resort
money he could make renting out his in their place by someone even wealthier. plans to develop more than 100 more
home when he wasnt there, with no We r e s m a r t , homes on the property; it has the legal
restrictions or fees. Since then, Zyda has right to build even more. The only way
changed career tracks and moved, and were mature, we that density can work, it seems, would
he and his husband, Michael Wieland, run hedge funds, be to discourage the homeowners from
finished building their home only in says Karen Witesman, who bought her using their places so often. Could that be
early 2015. By then, he says, many of the Hualalai condo in 2013. And then Dell and the entire reason for the crackdown on
things that had made being a homeowner this group are telling us what to do. And renters and house guests? If that were so
at Hualalai so special were well on their it goes against the grain of who we are. and only a lawsuit could shake loose the
way to being rolled back, all in the name Were so big and so wealthy, and were still truthit would mean that the homeown-
of crowd control. working with that little contract. ers were nothing but scapegoats for what
He shows me the latest two-page When discussing the possibility of Zyga claims is the resorts deeper inan-
schedule of guest fee rules, featuring an a lawsuit, the homeowners knew they cial problem.
The lawyer representing the defen- from Hawaiis days of sugarcane planta- island, he tends to cook. If hes hosting
dant group denies everything about this tions. All three homeowners love the new friends, he makes sure to go with them
hidden-agenda agenda, as well as the rules. All three cant stand renters. everywhere. All I keep thinking to
unfair competition argument. To prove The pool had been a major myself is, there is someone in the chain
unfair competition, they have to prove problem, says Mike Sack, who bought of command at the hotel who just does
the policy was made in bad faith, says in 2004 with his partner, suspense nov- not have a clue about marketing, he
attorney William Meheula. Thats going elist John Saul. Ive been down to the says. I worked at the Walt Disney Co.
to be hard for them to prove, given the pool, and someone has reserved ive for 10 years before I went to Amazon.
club documents they signed. And these chaises, and thats a problem for me. You have 300 homeowners who are
are sophisticated people. It had gotten more and more wealthy who are at this place and think
abusive, says Julie Wrigley, the widow its special. They all know other people
One of the things weve always believed of gum magnate William Wrigley III. Shes who are potential purchasers here. And
is trying to protect and preserve the bright-eyed, with a short brunette sweep all of our friends possibly stay at the Four
experience for members and guests hairdo. Since the $250 policy went into Seasons from time to time. Why would
here, says Patrick Fitzgerald, president efect, she says, theres been less crowd- you want to alienate that group of poten-
of Hualalai Resorts, whos managed the ing. Its been the irst time that that has tial customers?
property since before the Dell group worked. Same thing for the restaurants. Its unclear how likely Zydas suit is to
bought it. On a perfect sunny afternoon And getting a spa appointment. be granted class-action statusor even if
like any other, he takes me on a tour past Somebody did a down-and-dirty the judge will buy into the unfair compe-
the lagoon, the Tranquility Pool, the lots analysis of what we pay as owners tition argument. Meanwhile, the efects of
scheduled for development. He readily here vs. the $250 renters are charged, the lawsuit on the market are uncertain.
acknowledges that the policies have a says Susan Frampton, whose husband, Sales were strong in the irst quarter: eight
way of correcting an imbalance in the Harry, is a major developer of ski resorts residences and three development lots.
renter market. People told me, This in Vail, Colo., and elsewhere. And every But by many accounts, the rental market
is kind of easy for someone who other- day of the year, whether were here or has all but evaporated. One homeowner,
wise would not stay at the hotel. As an not, I pay $128.50. So how come renters, Carol Meyer, says her home generated a
example, if Im paying $1,600 a night to with no payback into the system, no ulti- half-million dollars in rental income in
rent a three-bedroom unit, and it costs mate responsibility for depreciation, 2014 and 2015. This year she cant get
$1,000 a night for a hotel room, the eco- were getting in free? Something had to anyone to rent.
nomics are very simple. be done. The Hualalai management is putting
Still, says Fitzgerald, a tall, athletic- Theyve all heard the argument that on a brave face. Some of the members
looking man originally from Queens, the fees are going to destroy property feel like, Wow, have you lost some of your
N.Y., the fees werent meant so much values. When the lawsuit gets settled, aloha spirit? Fitzgerald says. And our 67
to knock out competition as to create a Wrigley says, theyll sell their houses. perspective is, we dont think we have.
little congestion pricing. The hotel has Besides, resale value matters only to Unfortunately, we
always been full at Christmas, he says. certain people. This place isnt right
for everybody and doesnt need to be had to make some
all things to all people, she says.
a priorities. And
Wrigley socializes with Dell and you may not take
Walton. The Waltons are best friends
W
of ours, she says. Once in a while well
o that as aloha. But you
ask a question, and Rob will say, You
a know, it was just a business decision that
know, were not the managing investor.
k was important for the sustainability of the
But the nice thing is, they are long-term
B resort going forward.
investors
n and long-term thinkers. She If theres any common ground, its that
has less kind words for Zyda. While he
h everyone believes Hualalai is special
owned property here since 2001, hed
o too special to be destroyed. Zyda says
But then it got to where you couldnt not lived amongst us. He doesnt know hes open to resolving the case without
get a reservation for dinner at seven us. Its kind of hard to start a lawsuit just more bad blood. He pauses to do a little
oclock. Renters are great people. But after your home is done. mental math. Wed have to value the
we have to make sure we protect our Zydas hardly a lone wolf, I say. He loss of market value, because we cant
hierarchy of the Hualalai experience for has more than 70 potential co-plaintifs. rent the house anymore, he says. He has
our residents, members, and guests. No ones sued before, Sack says trouble settling on an answer. If they
To prove that most homeowners dryly. want Michael and me to not rent, he
approve of the new fee schedule, I ask the group: What would you say if inally says, Ill entertain the ofer. As
Fitzgerald lined up a meeting with three I were a homeowner sitting on this porch, long as were adequately compensated.
members of the Hualalai Members and I said these new fees make it impos- He wants to get back the aloha spirit. But
Advisory Board, a group of homeown- sible for me to aford living here? it wont come cheap.
ers brought in by management to consult Wrigley answers. Please, she says.
on such matters as the guest fees. The There are so many opportunities up and
next dayalso sunny, also perfectthree down this coast to own that have a policy
board members await me in the sheltered that might be more friendly. But its not
porch of the Hualalai Trading Company, why some of us bought here.
the resorts general store, which sells
heated malasadas, an addictive, sugar- Zyda doesnt go to the Hualalai res-
coated fried-dough confection popular taurants anymore. When hes on the
How the Most Boring CEO
In the Business Lucked Into
The Best Position* in the Biggest
Oil Patch in U.S. History
By Bryan Gruley and Joe Carroll
Photographs by Ben Sklar
68
BARRELS, GIVE OR TAKE!
Pioneer Natural Resources
CEO Scott Sheield
THATS 10 BILLION 69
n the fall of 2011, Tom Spalding, a slim geologist with salt- hold as much as 10 billion barrels of crude. Sheield estimates
74
If you want 100
at all, just a requirement that they stand at least 5-foot-7. Africa. Where, exactly, it doesnt say. Spokesmen for SOC and
A decade ago, after con men began running employment the other global security companies mentioned in this story
frauds on mercenary hopefuls, the Ministry of Gender, Labour, declined to comment.
and Social Development created the External Employment Unit, From the lobby, I spy a middle-aged white man working in a
an agency meant to track men leaving to serve abroad. Milton back room. He makes brief eye contact and then retreats around
a corner. When I inally sit down with Jefrey
Mugisha, a Saracen project manager, he tells
me that SOC maintains several employees at
Saracens compound, led by the man who
slipped away, whom Mugisha refers to as
Mr. George. Saracen, he says, supplies SOC
with more than 500 guards in Iraq, each of
whom earns about $900 a month.
people in a day 75
Interpol-issued permits, or are illegally traicked. A conserva- Returning guards use earnings to buy land, build homes, and
tive estimate is 20,000 Ugandan mercenaries working abroad start small businesses. Thousands of young mensome army
right now, according to Interpol igures and industry insiders. veterans but also civilians, from janitors and taxi drivers to
Its diicult to determine how many Ugandans have been unemployed university gradsswamp recruitment oices with
killed working as mercenaries, as this isnt a record maintained their credentials stufed in brown paper envelopes.
by any authority. There have certainly been deaths; I was As Islamic State loses ground, Ugandan subcontractors hope
told of four anecdotally on my visit. In March 2016, the U.S. to send men to Iraq to protect diplomats, patrol nongovernmen-
Department of Labor reported that 1,635 civilian contractors tal organization compounds, and guard oil ields. Crumbling
had died in Iraq since the start of the conlict. The same report security situations in South Sudan and Libya look promising,
counted 142 deaths since September 2001 among four large con- too. U.S. government contracts are the real payday, though.
tractors, including SOCall of whom have recruited heavily in Wherever the Pentagon next marshals a shadow army of secu-
Uganda. However, the report doesnt detail the nationalities rity contractors, an overwhelming number of those hired guns
of these casualties nor where they died. will likely be recruited from the trash-strewn streets of Kampala.
Some of the local companies are now quite large. Askar
Security Services was the irst recruiter to supply Western con- During the Iraq War, Secretary of Defense Donald Rumsfeld
tractors during the Iraq War, inding thousands of guards to sought to marry his light-footprint invasion strategy with free-
defend watchtowers and protect convoys. The company, owned market principles. Contractors scrambled to recruit thousands of
by Kellen Kayonga, the sister-in-law of President Museveni, has bodies to fulill lucrative Pentagon security contracts. The indus-
its headquarters in a massive, gated compound. On the wall in try had been growing since the mid-90s, but what happened in
the lobby is a framed photograph of Vice President Joe Biden Iraq was so extreme, says Deborah Avant, the director of the
inspecting Askar guards in Iraq. Sie Cheou-Kang Center for International Security & Diplomacy
Other outits are more modest. Two Niles Public Relations at the University of Denver. All of a sudden everybody needed
Agency occupies a shabby, two-room oice hidden in a swelter- these people. It was this enormous surge of demand.
ing shopping mall. Business stops when Abdulrazak Hussein, Uganda was a good place to ind soldiers. The pro-American
the managing director, goes to the storefront mosque next government voiced no qualms about its citizens working in
door to pray. When he returns, hes happy to chat. As a ceiling Iraq. In addition to speaking English, most of its population is
fan groans overhead, the recruiter prints out a tidy spread- Christian, minimizing the threat, real or imagined, of guards
sheet of his 16 contracts to date; one of them is for 500 guards aligning with insurgents. There was precedent, too:
working for Hemaya Security Services, a state-owned company Ugandan soldiers, known as askaris, had served in the
People who apply
for jobs at Middle a house, and started a tour company. With
East Consultants
have their blood his newfound wealth, Tukahebwa has won
tested before the chairmanship of a local soccer club and
applying, before an invitation from the ruling NRM party
leaving Uganda,
and again when to stand for a political seat. He was shot
they reach their during a ireight while guarding a Kuwait-
destination bound convoy, and the massive scar on his
left shin dissuades him from reenlisting,
but hes happy to activate a phone tree for
any recruiter who asks. If you want 100 people in a day, I can
get them, he says.
Many ex-guards are looking for more work, having either
squandered their paydays or entered the industry late in the
wars, after salaries had dipped. David Tumwesigye completed
two tours in Iraq from 2008 to 2013, earning from $400 to $800
a month. When I meet him at a downtown cafe, he shows me his
weathered passport and a certiicate from the King Abdullah II
Kings African Riles, ighting for the British Empire in both world Special Operations Training Center, a state-of-the-art counter-
wars. Best of all, from the point of view of recruiters, Ugandans terrorism facility in Jordan where he drilled in 2011 with a contin-
would accept dangerous assignments for not much money. Army gent of Saracen guards. Last summer, Tumwesigye was running
veterans gladly worked for $1,000 a month at a time when the around Kampala applying for a new overseas post. He was later
average salary at home was less than $300 a year. hired by Round Of International, a local Ugandan recruiter,
It wasnt a job for the faint of heart. Bajun Mavalwalla, a and deployed to Somalia, where hes now part of a 300-strong
former U.S. Army captain, spent a year at Camp Victory in Iraq, contingent of Ugandans guarding the United Arab Emirates
which was protected by Ugandans. The guards inspecting vehi- Embassy in Mogadishu.
cles for bombs were IED sponges, he says, and their low pay After returning from Iraq, former journalist Matsiko started
Matsikos voice crackles over the speakerphone with promises contract warfare was standard. Contractors are here to stay, he
to meet. I wait days with no word. I visit Pinnacles compound, says. Whether mercenaries are next deployed to combat Islamic 77
hoping to catch him. Inside the heavy metal gate, theres a hive State or on battleields yet unknown, he adds, they are part of
of activityjob seekers, uniformed guards, SUVsbut no Matsiko. the national security tool kit.
He rarely clocks in, a sentry tells me. Try the golf course. Ugandan guards graduated from the Iraq War with mixed
As I search for Matsiko, I hear increasingly fantastical stories grades. In 2009 the security company Triple Canopy, based
from local reporters: Hes careful about what he eats for fear of in Reston, Va., allegedly falsiied scorecards after all 330 of its
being poisoned by business rivals; his genitals were blown of Ugandan guards at the Al Asad Air Base failed a basic marks-
in an Iraqi ambush. When he inally relents and we meet at the manship test, according to a whistle-blower lawsuit. The case
upscale Serena Hotel, Colonel Kurtz hes not. Dressed in a blue is before the U.S. Supreme Court.
gingham shirt, he apologizes, in between lirting with a wait- But Ugandans appear likely to continue guarding American
ress, for giving me the runaround. I used to be a journalist, diplomats in Iraq and elsewhere. On Feb. 12 the State Department
he says. So when I hear a journalist is looking for me, I want awarded the next phase of its ive-year, $10.2 billion Worldwide
to get away as far as possible. Protective Services contract to shield diplomatic personnel,
In Iraq, he says, he killed three or four insurgents and was shot guard embassy buildings, and operate a leet of aircraft and
four times in the arm and back. His arm is indeed scarred, but the armored vehicles. Among the seven winning companies, at least
precise details of the incident are impossible to verify. Business is iveSOC, Triple Canopy, Sterling Global Operations, GardaWorld
good, he tells me, though it was better during the occupation of Government Services, and Aegis Defence Servicesrecruit or
Iraq. Matsiko has 300 guards there and in Afghanistana igure have previously recruited in Uganda.
corroborated by the Ministry of Genders External Employment Operation Inherent Resolve, the Pentagons anti-Islamic State
Unitand several hundred more in Burundi, the DRC, and the initiative, employed 7,773 contractors in the second quarter
UAE. In Uganda itself he has 400 guardsin rumpled blue of 2016, up from 5,000 in the irst quarter of 2015. If national
fatigues, they patrol the hotel where we meet, the country club armies and their proxies defeat Islamic State, returning dip-
where I eat, the banks where I withdraw cash, and the guest- lomats, investors, NGO workers, and others will need protec-
house where I sleep. He protects the United Nations compounds tion, much as they did after Saddam Husseins government fell
in Kampala and Entebbe, too. a decade ago. Contractors will ill the gap.
Matsiko and the others are ready to supply the bodies.
In the U.S., the debate over armed contractors continues in the Andama has 3,000 ex-guards on a waitlist for overseas posts.
same bureaucratic circles that irst touted them. The Pentagon Matsiko stays in regular contact with a local association for
likes mercenaries because they can be scaled up and demobilized returned guards so he can scale up quickly.
quickly. The nonproit Project on Government Oversight, however, Until then, the two men enjoy the spoils of war. Matsiko plays
argues that federal employees are often cheaper than contractors. golf three days a week, favors 18-year-old Scotch, and recently
Sean McFate, an ex-paratrooper, former military contractor, served as a judge for the Miss Uganda beauty pageant. Andama
and author of The Modern Mercenary, says the contractor boom leads a quieter existence in suburban Maryland. His son has
isnt an aberration but rather a return to medieval norms, when taken up football.
Recapture the freedom you had in your youth. But without your youth. Or your hair.
How
about
One Go Cube
has 50mg of cafeine,
equivalent to about half
a cup of cofee, along with
folic acid, vitamins B6
a
nice
and B12, and the amino
acid L-theanine,
which boosts the efects
of cafeine
c uofb e
c offe e
n ?
Etc. Productivity
ts 8 a.m. on a recent Wednesday in San Francisco, and beneit from other eiciencies? Many already bend the truth
Yan Zhu, a 24-year-old blue-haired software engineer, with their doctors to score Adderall. Nootrobox is just target-
sits at a communal table in a Thai-Italian restaurant ing the vast pool of upwardly mobile professionals who want
munching on a stick of butter. Shes too hungry to wait an edge but may not be ready to commit to prescription drugs,
for food; she hasnt eaten in 36 hours. This is my irst Woo says. Perhaps this is why he and Brandt have been able to
time fasting, and I was feeling faint, so I brought some persuade some heavy hitters in Silicon Valley to invest in their
butter from home, Zhu says. Her friend Ayumi Yu (pink vision, including Yahoo! CEO Marissa Mayer, Zynga Executive
hair, 27) explains theyre on a ketogenic diet, which Chairman Mark Pincus, and venture capital irm Andreessen
requires eating mostly fat and almost no carbohydrates. Horowitz, which led a $2 million funding round that closed in
Ive been on it for a month and feel amazing, she says. October. (Bloomberg LP, which owns Bloomberg Businessweek,
Take how you feel and imagine feeling twice as good. is an investor in Andreessen Horowitz.) Woo says only that
Danny Friday, a 23-year-old startup founder, emerges from the Nootrobox, with its thousands of monthly subscribers, is a
bathroom. Hes just done a urine test to check his ketosis levels, multimillion dollar business, but he declines to elaborate.
which indicate how the body is metabolizing fat. Im shocked, For two fasting workaholics, Woo and Brandt look healthy.
he says, dismayed. My body is barely in ketosis. The friends and roommates met as undergrads at Stanford,
All three, along with about 25 other people, are here to take where they majored in computer science and bonded by trading
part in a weekly break fast. The hosts, Geofrey Woo and Michael self-improvement tips. After college, Woo founded a location-
Brandt, are the 27-year-old co-founders of Nootrobox, a startup tracking company that Groupon later acquired; Brandt joined
that sells nootropics, or pills intended to enhance memory, then-Google COO Mayers elite associate product manager
cognition, and mental stamina. Although fasting is not neces- program. In 2014 they got into the nootropics business. Friends
sarily part of a nootropic regimen, the widely accepted health- were playing around with Adderall and smart drugs, Woo says.
boosting efects of periodic starvation make it a natural it for Some were even ordering nootropic powders online and mixing
people who think a monthly pill subscription service can make their own concoctions. They literally have a drug scale and are
them more perfect humans. Well do a 36-hour or 60-hour fast weighing out, like, 50 milligrams of powder in their kitchens
every week, says Woo, Nootroboxs chief executive oicer. Its its messy, he says. We realized that if people are willing to go
hard at irst, but we found a lot of beneit to our lucidity and through this much trouble, this much sketchiness to tap this
clarity of mind. The companys online fasting forum, WeFast, resource, there must be something there.
has about 600 members. Brandt and Woo read studies and began experimenting with
80 Nootroboxs mission is to improve the way we function on a nootropic powders available online. Some had unexpected
daily basis. In the oice of the future, people will get to work, side efects. I tried noopept, a Russian Alzheimers therapeu-
sit down, and pop a pill to help them focus better, says Brandt, tic, Woo says. The drug made him alertbut it also altered his
Nootroboxs chief operating oicer. When that future will arrive sensory perception. I remember walking to the BART, the public
is unclear. But if oice drones are already willing to give up their transit system in San Francisco, and the lowers on the side of the
lunch break to slurp Soylent, whats to say they wouldnt like to road, dafodils, looked really bright. In the end, the co-founders
decided not to sell a product that triggered mild hallucinations
and, instead, to work with supplements approved by the U.S.
Food and Drug Administration. You cant make a business
selling illegal, gray-area stuf, Woo says.
Nootroboxs oice, in a corner of a WeWork co-working space
in the SoMa neighborhood, is covered in slogans such as Hustle
Harder. The companys products, formulated using a combina-
tion of peer-reviewed studies and bro science, are
as prevalent as iMacs. Theres Rise ($44 for 60 pills),
which touts a ratio of compounds shown in studies
to improve memory; Sprint ($36 for 30), packed
with B vitamins, cafeine, the cafeine-enhancing PREVIOUS PAGE: PHOTOGRAPH BY WILL ANDERSON FOR BLOOMBERG BUSINESSWEEK
respectively, which are more potent than Nootroboxs oferings. comes from berries, and the berries of any plant are incredibly
To sell piracetam in the U.S., Matzner labels his gold-colored rich in antioxidants, she says. The problem with supplements
jars with the disclaimer intended for use in neuroscience is they often focus on just one, or a few, ingredients but lose the
research only. He says he has almost 1,000 subscribers who synergy that comes with eating the actual food.
pay $55 a month. In addition to Nootroos pills, Matzner says he Nootrobox is working with Maastricht University in the
downs as many as 40 supplements per day, which he believes Netherlands to test the beneits of Sprint vs. pure cafeine on
will improve his brain and extend his life span: I take them what Woo describes as a battery of psychometrics (reac-
before even getting out of bed in the morning. He pulls out tion time, short-term memory, etc.). In mid-April, Nootrobox
a laptop emblazoned with stickers of two large gold pills and announced its exploring a partnership with personal-electronics
begins lipping through links to studies. This is stuf you cant company Jawbone to make an app for wearables that will let
get from just eating food, he says. One is from the skin of a users igure out how nootropics afect measurements such as
pineapple, one is from the stomach of a silkworm. To demon- heart rate. For Woo, each step the company takes is in service
strate the fruits of his experimentation, Matzner performs an of ensuring the future relevance of mankind. What we want
impromptu speed-typing test on his laptop. He can hit 150 words to unlock is the next-level thinking that makes us human, he
per minute; 40 is about average. says. In a way, its almost arming humanity against artiicial
On a Monday back in New York, I try Nootroos neuroscience intelligence and robots.
*Not all of Nootroboxs ingredients have undergone peer-reviewed testing
Etc. Design 9
OFFICE TIME MACHINE The 1970s are the next big thing. By Danielle Selig
PHOTOGRAPH BY MATTHEW TAMMARO FOR BLOOMBERG BUSINESSWEEK; SET DESIGNER AND STYLIST: DANEILLE SELIG; ON LOUNGE: VALEXTRA TRIENNALE BRIEFCASE, $4,100
82
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MOLDED PLYWOOD SCREEN Looks even better illed 8. ESTABLISHED & SONS
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of the classic Eames $1,490; los.com THIRD EYE VESSEL As easy to read as
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mesh at the joints to this desk lamp would perfect.com time, date, and day of
make it more lexible be right at home next to Red serpentine marble the week are revealed
and durable. an Apple II. provides magazines a on lipping laps.
dramatic perch.
2. CESCA CHAIR BY 5. FLORENCE KNOLL 9. MONTE CARLO
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$1,489; knoll.com $7,232; knoll.com CRESCENT LOUNGE $188; lightingby
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together like Starsky are a discreet place Recline in minimalist Epcot didnt open
and Hutch (that is to for that spare white comfort after your until 1982, but this
say, perfectly). dress shirt. three-martini lunch. fan is very that.
Technology Etc.
I need to explain myself. For the past week, I may have seemed short, or even
a bit odd, over e-mail. Its not you, its me. Actually, its not me, its Google.
Recently, the company added Smart Reply to its desktop Inbox service, which
sorts e-mails into relevant batches for you. When you get certain messages,
Google ofers up prewritten answers. You click on one of three suggestions,
hit Send, and youre done.
I decided to use Smart Replyand only Smart Replyfor a week. It meant
surrendering my voice to Googles, which was sometimes an odd t. Dad, when
you told me you were having an angiogram, you may have found my
response of Good luck! a bit brusque for the occasion. On the other
hand, when I agreed with you, Emily, by writing, Thats what I thought!
it was what I thought. It was also what Google suggested.
Smart Reply may seem like an insignicant shortcut, but it marks the
start of our robot overlords reign. The responses Google generates
arent randomnor are they the product of a simple rules-based equa-
tion in which a search for certain words generates a corresponding
reply. How do I know this? I e-mailed the company and asked to talk to
someone (on the phone, so I could be sure it was a human) about how 83
it works. The human was Greg Corrado, senior research scientist at
Google Brain, whose department developed the feature, at rst just for Inboxs mobile app. It learns
by example, he told me. It learns to mimic behavior that we demonstrate for it.
Smart Reply understands the content of the message youve received, as well as its tone. When
I replied to friends and family, my canned responses often had a cheery exclamation point (Great!
Cant wait!). When I replied to someone less familiar, Smart Reply was more
sober: That sounds good. Thank you.
On some level, Ive betrayed you. You took the time to write, and all I did
was roll my mouse around. Fortunately, none of you seemed to detect the
outsourcing of our correspondence, though Im not sure what that says
about your ability to pass a Turing test. Alyssa, after I said that lunch Sounds
great! you suggested some dates. Unfortunately, Smart Reply countered with
Great! Does 6:30 p.m. work? (Googles still working out some kinks.) Even
though I like the idea of Spanish-inuenced meal times, 6:30 was beyond
PHOTOGRAPHS BY CAROLINE TOMPKINS FOR BLOOMBERG BUSINESSWEEK; GETTY IMAGES (2)
Love,
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B
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natural disaster potential on May 13) presents a familiar antihero supporters revenge fantasy against a
roughly t wo decades ago, in Lee Gates (George Clooney), a bom- rigged system. As the character reminds
sending down a hail of movies bastic Jim Cramer-esque television host. his captives, I might be the one with the
about megastorms (Twister), The self-proclaimed wizard of Wall gun here, but Im not the real criminal.
supervolcanoes (Dantes Peak), Street, hes a mouthpiece who Studios will gladly wring the inancial
and earthbound asteroids inluences the market with smug corruption sponge as they have with
(Deep Impact, Armageddon). claims that certain stocks are biblical loods and ire raining from
Although the industry still peddles in safer than a savings account. the sky, tweaking the details as
weird weather (Sharknado 4), studios But when one of Gatess necessary. (Consider this
seem to have turned their attention to a sure things, Ibis Clear summers Equity, starring
new type of scary moviethe unnatural Capital, bottoms out over- Breaking Bads Anna Gunn,
disaster lick, which derives its shocks night, losing $800 million
CLOONEY PLAYS which has been described
COURTESY CTMG. CRAMER: BRAD BARKET/GETTY IMAGES
not from acts of God but from acts of because of whats dubi- A JIM CRAMER- as the irst female-driven
bankers. Films in this category include ously desc ribed as a film about Wall Street.)
Margin Call (2011), Too Big to Fail (2011), computer glitch, Gates
ESQUE MARKET They like how the math
The Wolf of Wall Street (2013), The Big is taken hostage on-air by INFLUENCER adds up, so they gotta
Short (2015), and now Money Monster, 24-year-old deliveryman keep rewriting the equa-
which moves the nascent genre into its Kyle Budwell (British actor tion, Budwell says of
adolescent, formulaic phase. Jack OConnell, chewing on a Brooklyn the big banks anything-goes manner
Directed by two-time Oscar winner accent here to mixed efect). Patty Fenn of keeping the odds and dollar signs
Jodie Fosterwhose most recent behind- ( Julia Roberts), Gatess longtime pro- forever in their favor. Count Hollywood
the-camera credits include episodes of ducer, becomes a de facto crisis nego- in. Greed is good, after all. We learned
Netlixs House of Cards and Orange Is the tiator, keeping Gates engaged with that at the movies.
What I Wear to Work Etc.
RESHEF
54, legal assistant,
hung up on labels.
If I see an item that
looks good on me,
Ill pick it up.
Loeb & Loeb, New York
PARK LANE
What do you do?
I work for two partners
and two associates. Where did you get your
One partner is in trusts style sense?
and estates, and the My dad was an illustrator,
others in nonproits. and I grew up in a house
illed with art and color.
I think it helped me see
what works well together.
87
CHARLOTTE RUSSE
What cuts do you prefer?
I have to be wary that Im
not dressing too young.
I can still get away with
wearing something body-
hugging or a skirt above
the kneethings that are
sometimes put away
for a woman in her 50s.
Whats your look?
Classic. People tell
me that Im always
put together and
elegant.
JC PENNEY
PHOTOGRAPH BY CHRISTOPHER LEAMAN FOR BLOOMBERG BUSINESSWEEK
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TOM COLICCHIO
Owner, Crafted Hospitality; head judge, Top Chef
Nowadays
I was hired to scoop ice cream I wouldve been
Education diagnosed with ADD.
and do the cash register
You know, IQ says
at a swim club, and within a one thing, grades say
week I was doing all the Elizabeth High School, something else.
Elizabeth, N.J.,
shor
short-order cooking for $275 class of 1980
awweek under the table. As a freshman
in high school
Work
Experience
I worked in restaurants
In the kitchen 198082 all over the Eastern Seaboard.
of his apartment in Busboy, prep cook, Who can keep track?
East Orange, N.J., Evelyns Seafood,
during his early 20s Elizabeth
I usually leave this With Meyer,
1984 one of my rsum. late 90s
It was a four-star Night chef, Hilton
Secaucus Hotel,
restaurant. I was New Jersey
88 still planning on
culinary school, 198586
Line cook, sous chef,
but once I was Quilted Girafe, New York
promoted from line
cook to sous 198788
Line cook, co-chef,
chef, that was it. 40 Main Street,
Milburn, N.J.
Crafted Hospitality
ke
1. Change quickly. You typically dont get a second chance. 2. Be your own farm team. If you dont provide opportunities to grow, people leave. 3. Ma
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